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Audit Act - Auditor- General - Audit reports - 1994-95 - No. 7 - Efficiency audit-Department of Industry, Science and Technology: national interest export finance and insurance


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THE AUDITOR-GENERAL

Audit Report No.7 1994-95

Efficiency Audit

Department o f Industry, Science and Technology

National Interest Export Finance and Insurance

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A u s t r a l i a n N a t i o n a l A u d i t O f f i c e

The Auditor-General

Audit Report N°7 1994-95

Efficiency Audit

Department of Industry, Science and Technology National Interest Export Finance and Insurance

David Spedding Bruce Macdonald Frank Wall Russell Lapthorne

A u s t r a l i a n G o v e r n m e n t P u b l i s h i n g S e r v i c e , C a n b e r r a

®Commonwealth of Australia 1994

ISSN 1036-7632

ISBN 0 644 35095 4

This work is copyright. Apart from any use as permitted under the Copyright Act 1968, no part may be reproduced by any process without prior written permission from the Australian Government Publishing Service. Requests and inquiries concerning reproduction and rights should be addressed to the Manager, Commonwealth Information Services, Australian Government Publishing Service, GPO Box 84, Canberra ACT 2601.

Produced by the Australian Government Publishing Service

Australian National Audit Office Canberra ACT 16 November 1994

Dear Mr President Dear Mr Speaker

In accordance with the authority contained in the Audit Act 1901 I have had the ANAO undertake an efficiency audit of the role of the Department of Industry, Science and Technology in the management of national interest export finance and insurance and present this

report and the accompanying brochure to the Parliament. The report is titled Department o f Industry, Science and Technology - National Interest Export Finance and Insurance.

The Honourable the President of the Senate The Honourable the Speaker of the House of Representatives

Parliament House Canberra ACT

Yours sincerely

V W.G. Nelson

Acting Auditor-General

AUDITING FOR AUSTRALIA

The Auditor-G eneral is head of the Australian National Audit Office. He and the ANA O are

independent o f the Government. The A N A O assists the Auditor-General to carry out his duties

u n d e r th e A u d i t A c t to u n d e r t a k e a u d its o f p e r f o r m a n c e and f in a n c ia l s t a te m e n ts o f

Com m onw ealth public sector bodies and to provide independent reports and advice for the

Parliament, the Government and the community. The aim is to improve Commonwealth public

sector administration and accountability.

Auditor-G eneral's reports are available from Commonwealth Government Bookshops. Recent

titles are shown at the back of this report. For further information please contact:

The Reports and Publications Officer

ANAO

Centenary House

19 National Circuit

Barton ACT

GPO Box 707 Canberra ACT 2601

phone (06) 203 7537, fax (06) 203 7777

iv

Contents

Abbreviations vii

Key Points viii

Report Summary xi

Recommendations and Responses xix

1. National Interest Export Finance and Insurance 1

Introduction 1

The role of the Department 2

Types of national interest facilities and value of new business 2

Financial reporting and accounting arrangements 3

Interdepartmental committee review 8

Objectives, scope and conduct of the audit 9

2. Assessment of National Interest Proposals 11

Introduction 11

The assessment process 11

3. Notional Accounts on Financial Results 27

Introduction 27

Financial results of national interest facilities 27

Preparation of notional accounts 28

4. Underwriting and Premium Rates 35

Introduction 35

Surcharges for risks 35

Linkage to other Government policies 36

5. Management Information Systems 43

Introduction 43

Case register 43

Computerised databases 44

Appendix 1 EFIC National Interest Business Activities, 1992-93 45

Appendix 2 EFIC National Interest Financial Information, 1992-93 46

Series titles 49

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Tables

1.1 Types of national interest facilities and value of new business, 1992-93

1.2 National interest receipts and claims 1987-88 to 1993-94

1.3 National interest recoveries 1987-88 to 1993-94

3.1 Summary of national interest facilities financial data, at 30 June 1994

Figures

1.1 National interest contingent liabilities 1990 to 1994

1.2 National interest outstanding debts 1990 to 1994

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Abbreviations

ANAO Australian National Audit Office

AWB Australian Wheat Board

CRF Consolidated Revenue Fund

DPIE Department of Primary Industries and Energy

EFIC Export Finance and Insurance Corporation

GATT General Agreement on Tariffs and Trade

IDC Interdepartmental committee

OECD Organisation for Economic Cooperation and Development

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Key Points

The Export Finance and Insurance Corporation Act 1991 gives the Minister for Industry, Science and Technology the power to approve export finance and insurance assistance to export proposals of Australian business referred by EPIC, if he is satisfied that it is in the national interest. The Department of Industry, Science and Technology advises the Minister on each proposal after considering the views of relevant government departments on an

interdepartmental committee. Large or significant proposals are usually referred to the Government for approval.

By underwriting the risk associated with proposals, the Commonwealth has helped Australian exporters to make export sales in high risk markets unattractive to EPIC or commercial underwriters. Since 1975, 220 national

interest cases have been submitted to the Minister for consideration and exports totalling $7.6b have been assisted under the national interest export facilities. ;

It is more than 30 years since the facilities were introduced and the Parliament was advised of some important considerations that the Government at that time said would influence its decisions to underwrite national interest cases. The EPIC Act does not define national interest. The AN AO considers that the Parliament should be informed o f the considerations

that are now relevant in assessing national interest proposals.

In the ANAO view, export proposals recommended for support in the national interest should involve some demonstrable benefit to the nation, as well as to the exporter. However, many of the departmental assessments of export proposals reviewed during the audit failed to identify clearly the expected national benefits, other than payment for the exports, that justify risking taxpayers’ funds. The Department should be more rigorous in its assessment and documentation of proposals.

There have been only a small number of cases where overseas buyers have failed to pay for exports assisted under the facilities. However, these cases have involved large claim payouts in excess of $1.3b. The claims resulted from the economic difficulties of Egypt ($271m) and Russia ($393m), and United Nations sanctions on Iraq ($520m). The debts o f Egypt and Russia

are the subject of multilateral rescheduling arrangements.

The Department has not assessed the long-term financial results of Australia’s government-sponsored export credit facilities, including the national interest facilities. The subsidies code of the General Agreement on Tariffs and Trade (GATT) requires that these facilities pay their way over time. The ANAO considers that the Department needs to determine parameters for measuring

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whether Australia is meeting its international obligations. It should prepare appropriate notional accounts of cumulative financial results on an ongoing basis.

Until 1992, premiums paid by exporters for national interest support were not linked to proposal risk. Since that time higher surcharges have been recommended by the Department for higher risk. However, premiums continue to be set without knowing the cumulative profit or loss arising from

the provision of the facilities.

The Department’s management information systems that support the provision of the facilities need upgrading.

Departmental response

The Department does not share the ANAO’s view on a number of these issues.

It sees the purpose of the national interest export facilities as identical to the principal purpose for which EPIC was established, namely to facilitate and encourage Australian export trade by the provision of insurance and financial services and products. It considers that the facilitation and encouragement of

exports may, in itself, justify approval of export proposals in the national interest, where the nature of the associated risks is acceptable. It said it also takes other significant and relevant benefits into account.

The Department stated dial there is no internationally accepted interpretation of the GATT requirement that government-supported exported credit facilities pay their way over time. Australia and other countries have not addressed the obligation and Australia is currently taking an active role in multilateral

deliberations on this matter. The Department also advised that it is aware of the current financial position of the national interest facilities and provided a summary of financial information (see page 29).

The Department agreed to most of the ANAO recommendations and expressed its view that some others are policy matters for the Government. It advised that it has taken action to identify more explicitly the potential benefits of national interest proposals and is developing a notional account. It

also advised that it will monitor the outcomes of national interest facilities and improve management information on the facilities.

The Department noted the recommendation that the Parliament be advised of the national interest factors that generally are relevant considerations in assessing national interest cases. It advised that it is a policy matter for

consideration by the Government. The ANAO believes that the Department, as part of its policy advising responsibilities, should carefully consider the recommendation and provide appropriate advice to the Minister on tiiis matter.

IX

The national in terest export fa cilities have supported w ool exports to Poland and the former USSR. Photo courtesy o f EFIC

x

Report Summary

The national interest export facilities

1. The national interest export facilities enable the Government to provide direct support by way of finance and insurance for Australian exports.

2. The authority for the facilities is the Export Finance and Insurance Corporation Act 1991. EPIC generally refers proposals to the Minister that it regards as commercially sound but is unwilling to accept because of the level of country risk, or because of operating

restrictions relating to its need to maintain a balanced risk portfolio.

3. The Act provides that die Minister may approve a proposal if he is satisfied that it is in the national interest. The Act does not define national interest. Large or significant proposals are usually referred to the Government for approval.

D e p a r t m e n t 's role in 4 . The Department’s role is to assess proposals referred by EPIC proposal a s s e s s m e n t and to put them to the Minister with a recommendation on whether to approve them in the national interest. In making its assessment it takes into account the views of a standing interdepartmental

committee (IDC) comprising relevant government departments. The Department also advises the Minister on policy and accountability aspects of the facilities.

5. Premiums and fees on national interest cases, net of EFIC’s costs, are paid to the Commonwealth. Claims or losses incurred by EFIC are financed either from departmental appropriations or by borrowings authorised by the Treasurer.

6. Government-supported export credit facilities are required to pay their way over time under the subsidies code of the GATT.

The audit

7. The audit examined the Department’s management of the national interest export facilities, particularly:

• the process for assessment of proposals

• the cumulative financial results of the facilities and the

preparation of notional accounts to report on results

• the development and application of underwriting and premium policies, and

• management information systems for the facilities.

EFIC’s operations were not subject to audit.

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Audit findings

N a t i o n a l i n t e r e s t

b e n e f i t s f r o m

p roposals n e e d to be

more clearly identified

8. The national interest export finance and insurance facilities have provided valuable support to Australian firms seeking to make export sales in markets not covered by the commercial sector and in which EPIC is unable on prudential grounds to offer full support. With acceptance of risk by the Commonwealth, the facilities have helped to secure export sales that would otherwise not have been made.

Assessment of proposals

9. It is more than 30 years since the national interest facilities were introduced and the Parliament was advised of some important considerations that the Government at that time said would influence its decisions to underwrite national interest cases. These considerations included whether the export proposals would open up worthwhile new markets or confer some obvious and significant benefits for Australia’s trade relations with other countries. The

EPIC Act does not define national interest. More recently, some additional national interest factors which may be relevant considerations in the Department’s assessment of national interest proposals have been identified, but not announced publicly.

10. In the ANAO view, export proposals recommended by the Department for support in the national interest should involve some demonstrable benefit to the nation, as well as to the exporter. However, many of the departmental assessments of proposals reviewed during the audit did not identify clearly expected outcomes, other than payment for the exports, that justify risking taxpayers’ funds. The Department should give more consideration to the meaning of the national interest. It should mean something more than facilitating and encouraging exports in circumstances where the exporter could not secure export finance or insurance elsewhere.

11. The ANAO considers that the Department should be more rigorous in its assessment and documentation of proposals and that the Parliament should be informed of the considerations that are now relevant in assessing proposals.

12. The Department does not share the ANAO’s view of the national interest facilities. It believes the purpose of the national interest facilities is established by the EPIC Act and that this is to encourage and facilitate exports. It stated that, having regard to EFIC’s advice on acceptability of the commercial risks and the views of the IDC which examines each proposal, the Department generally recommends in favour of an export proposal if the other risks are acceptable and there are no other relevant adverse considerations. The Department sees a statement to the Parliament on the purpose of the national interest facilities and factors that may be relevant considerations in the assessment of proposals as a policy matter for the Government.

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The financial results of the facilities

Claim p a y o u t s h ave

e x c e e d e d $ 1.3b

Cumulative financial

r e s u lts n e e d to be known

13. Since 1975, 220 national interest cases have been submitted to the Minister for consideration. Exports totalling some $7.6b have been assisted under the facilities. Only six approved proposals have resulted in claims on the Commonwealth; three of these have been for very large amounts. Substantial claims due to non-payment have

resulted from the economic difficulties of Egypt ($27lm) and Russia ($3 93m), whose repayments are the subject of multilateral debt rescheduling arrangements providing for repayments over 25 years and six years, respectively. Further substantial claims ($520m) resulted from the imposition by the United Nations of economic sanctions on Iraq. The rescheduling arrangements for Egypt include up to 50% debt forgiveness in net present value terms. In each of these cases the decision to provide national interest support

was taken after consideration by the Government.

14. The large claim payouts in excess of $ 1.3b have been incurred since 1987-88. Premium and fee income has amounted to $81m. The recoverability of subrogated debts totalling $1.2b as at 30 June 1994 arising from claim payouts has been affected by the multilateral rescheduling agreements and repayment delays due to United Nations sanctions mentioned above. (Subrogated debts are those formally due to EFIC but due in practice to the

Commonwealth.) Deferral of debt repayments and adoption of concessional interest rates effectively have reduced the present value of the debts.

15. The GATT subsidies code requires that officially supported credit agencies pay their way over time. However, the Department has undertaken an exercise on only one occasion to ascertain cumulative financial results and this exercise was limited to the national interest

facilities, rather than EFIC commercial and national interest accounts. The exercise disclosed a $530m cumulative deficit as at the end of March 1990.

16. The Department should determine parameters for measuring whether Australia is meeting its international obligations and prepare appropriate notional accounts of cumulative financial results on an ongoing basis.

17. The Department advised that it was developing a notional account. It noted that there is no internationally accepted

interpretation of the GATT requirement. It stated that it does not believe Australia’s best interests are served by a unilateral interpretation of the GATT requirement in advance of current work in

the OECD to develop a common understanding of the GATT concept.

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Underwriting and premium policies

Premiums previously

w e r e not linked to

proposal risk

18. Underwriting and premium rates for national interest proposals have been recommended by the Department to the Minister without knowing the cumulative profit or loss arising from the provision of the facilities. The cumulative financial results should be a factor in

setting rates. Until 1992 premiums and fees were based on an arbitrary, across-the-board surcharge of 25% above EPIC commercial rates. They were not related to the level of risk for specific proposals or to amounts necessary to cover the costs and outgoings of the facilities. Since 1992 higher surcharges have been recommended for higher levels of risk.

19. The Department indicated that in recommending underwriting and premium rates for national interest transactions it is aware of the current financial position of the national interest facilities as well as previous ‘losses’ on the national interest account.

D e p a r t m e n t a l

a s s e s s m e n t s s h o u l d

e n s u r e s u p p o r t e d

p r o p o s a l s m a t c h

b r o a d e r p o l i c y

o bjectives

20. There was a lack of evidence that the Department specifically considered longer term objectives for the development of exports and meeting the objectives of other Government policies in either assessing national interest proposals or setting premiums for them. The ANAO made recommendations for the use of an expanded checklist of national interest factors that generally are relevant considerations, to help ensure that these issues are taken into account in the assessment process. The ANAO considered the case for using rebates and excesses on national interest cover to advance these objectives and also to reduce Commonwealth exposure to potential claim payments, but was persuaded by the Department that such measures are not practicable. However, the ANAO recommended that the Department consider introducing graduated variations to underwriting conditions over time to assist in industry reform for appropriate mainstream exports.

Management information

21. There is a need for enhancements to management information systems to provide the basis for more informed decision-making and recommendations to the Minister on policy issues.

Departmental responses

A c t i o n t a k e n or 2 2 . The Department agreed to most of the A N A O recommendations, p r o p o s e d b y t h e In particular it:

D epartment

• accepted the need to identify more explicitly the potential benefits of national interest proposals in departmental submissions to the Minister and advised that it had taken action to address this

• recently introduced a checklist of national interest factors relevant to the consideration of proposals during the assessment process and now proposed to add specific risk factors to the checklist

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Main d i f f e r e n c e s of

v iew b e t w e e n t h e

D e p a r tm e n t and t h e

ANAO on t h e r eport

r e c o m m e n d a t i o n s

• recognised the value of monitoring outcomes of national interest facilities and would check that projected benefits of proposals are achieved

• was addressing the development of notional accounts, and

• proposed to produce improved statistical information on the national interest facilities and investigate the cost-effectiveness of options to upgrade its computer database of national interest transactions.

23. There were two main areas where the Department stated that it was not in a position to commit itself to the implementation of die ANAO recommendations. The views of the Department and the ANAO on these issues are summarised below.

24. The Department considered that the question of clarification of the purpose of the national interest facilities through a public statement identifying considerations relevant in assessing national interest proposals is a policy matter for the Government. It stated

that the policy of successive Governments was not to define national interest but rather to consider individual proposals on their merits after taking into account relevant considerations.

25. The ANAO acknowledges that it is for the Minister to decide to make a public statement on the purpose of the national interest facilities. However, ANAO believes that the Department, as part of its policy advising responsibilities, should carefully consider the recommendation and provide appropriate advice to the Minister on this issue.

26. The ANAO does not propose that the Government define national interest or suggest that the Government consider national interest proposals other than on their merits. The ANAO view is that the Parliament is entitled to be informed of the national interest factors that currently are relevant considerations in the assessment of national interest proposals. It is the Parliament that appropriates taxpayers’

funds to pay any claims supported under the facilities. More than 30 years have elapsed since the facilities were introduced and the Parliament was advised of some important considerations that the Government at that time said would influence its decisions.

27. The Department advised that while it is developing cumulative notional accounts, there are a number of difficult issues to be addressed. Once these are resolved, the Department will be better

able to assess the applicability of notional accounts. In its view, the ANAO recommendations on presentation of notional accounts to the Parliament and underwriting and premium rate strategies are policy matters for consideration by the Government. It also stated that any assessment as to whether the facilities pay their way, as required by the GATT subsidies code, should be deferred until after a multilateral review of the GATT requirement.

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28. The AN AO view is that the Department should prepare the notional accounts as soon as practicable and provide policy advice to the Minister on issues associated with them. Australia needs to know whether it is meeting its international obligations. If the multilateral review leads to revised requirements for measuring long-term operating costs and losses of such facilities, the Department can then modify the affected parameters of the notional account.

1DC member comments

29. Because of references to EPIC and the IDC on national interest exports, a copy of the proposed report was sent to EPIC and each member of the IDC for any comments they might wish to make. Comments were received from the Departments of Primary Industries and Energy (DPIE), the Treasury and Finance.

Department of Primary Industries and Energy

30. DPIE indicated that it would have difficulty with part (a) of ANAO Recommendation N °l, which seeks Government clarification of the purpose of the national interest facilities in a public statement identifying considerations that are relevant in assessing proposals. DPIE advised that assessment of the national interest is best taken account of at Ministerial level and it would be inappropriate to constrain Ministers in the way that DPIE perceived was proposed. It believed that individual proposals should continue to be considered on their merits, taking account of actual circumstances prevailing at the time.

31. The ANAO considers that the recommendation does not seek to constrain the Minister who, under the EPIC Act, may approve a proposal if he is satisfied that it is in the national interest.

32. DPIE did not comment on the other recommendations, but noted the importance of full consultation with relevant departments to ensure the benefits and risks of each national interest case are properly considered. It said that recent experience suggests there may have been some deficiencies in that respect, with the Department of

Industry, Science and Technology perhaps relying too heavily on informal contacts rather than seeking confirmation from departments.

33. DPIE also provided detailed comments on the issue of the desirability of varying national interest underwriting conditions over time to assist in achieving broader Government objectives, with particular reference to the ANAO example of wheat credit exports. This issue is discussed further in Chapter 4 of the audit report.

Department of the Treasury

34. The Department of the Treasury noted that the ANAO recommendations mainly relate to the Department of Industry, Science and Technology and EPIC, rather than the IDC process in

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which it participates. The Treasury provided specific comment on the abovementioned ANAO example of wheat export credits (see Chapter 4).

Department of Finance

35. The Department of Finance advised that comment on the audit report is essentially a matter for the Department of Industry, Science and Technology.

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■

■

Recommendations and Responses

Set out below are the ANAO recommendations (together with the relevant report paragraph reference), the reasons for making them and the Department’s responses. Where appropriate, the ANAO has included additional comment on those responses. The ANAO considers that the Department should give priority to Recommendations Nos 1, 2, 6 and 7.

Assessment of proposal benefits and risks

The ANAO recommends that the Department:

(a) propose to the Minister that the Government clarify the purpose of the national interest export facilities in a public statement that confirms the 1961 considerations or explains that other considerations are now relevant in assessing proposals, and

(b) set out in its submission on each proposal an assessment that shows clearly how it satisfied itself that it would be in the national interest to risk public funds by approving it. (2.24)

The first part of the recommendation will enhance accountability to the Parliament, by helping to ensure that the Parliament is properly informed of the national interest factors that now are generally relevant considerations in the Department’s assessment of national interest proposals.

The second part of the recommendation will result in submissions which are clearer in the reasons for their assessment and demonstrate that Commonwealth support for proposals is justified. Higher quality assessments will lead to more effective national interest facilities.

Response

(a) Noted. The Department considers this to be a policy matter for consideration by the Government.

The purpose of EPIC, including the national interest function is, as set out in the EFIC Act 1991, to facilitate and encourage Australian export trade. The policy of successive Governments since 1961 has been not to define what constitutes the national interest in this context but rather to consider individual proposals on their merits, taking into account relevant considerations. This approach was re-assessed in 1993 in the context of an interdepartmental review of the national interest facility. The IDC concluded that it was not practical to seek to define what might constitute the national interest. The Government has re-endorsed the policy of considering individual proposals on their merits.

xix

(b) Agreed.

The Department accepts that in some past cases its advice to the Minister could have been more explicit in identifying potential benefits. It has taken action to address this.

ANAO comment on response 1(a)

The ANAO notes the Department’s position that the recommendation is a policy matter for consideration by the Government and acknowledges that it is for the Minister to decide to make a public statement on the national interest facilities. As part of its policy advising responsibilities, the Department should carefully consider the recommendation and provide appropriate advice to the Minister on this issue.

ANAO Recommendation 1(a) does not propose that the Government define what constitutes ‘national interest’. Nor does it suggest that the Government consider individual national interest proposals other than on their merits.

However, as outlined in Chapter 2 of the audit report, it is now more than 30 years since national interest facilities were introduced, and the Parliament was advised of some important considerations that the Government at that time said would influence its decisions to underwrite exports on national interest grounds. An IDC in 1993

identified some additional considerations which the Department indicated it now takes into account in recommending approval of national interest proposals. In its comment on the audit report, the Department identified some other Government policy objectives served by successful export contracts which further the national interest. A number of additional national interest factors were also proposed by the ANAO.

Such an expansion in the list of national interest factors which may be relevant considerations in recommending Commonwealth underwriting of particular export proposals is to be expected, given the passage of time since 1961 and in the context of more recent Government policy initiatives for Australian industry, as well as developments in the international trading environment. The kind of export proposals being considered for national interest support has also diversified over

this period.

In the event of national interest exports not being paid for by overseas buyers and borrowers, it is the Parliament that appropriates taxpayers’ funds to meet the claims. Accordingly, the Parliament should be informed of the basis on which the Department now recommends that the Commonwealth underwrites national interest transactions.

xx

The ANAO recommends that in the checklist of national interest factors to consider in the assessment of proposals the Department include significant Government policies, industry and economic strategies and the capacity of the exporter to provide support services. (2.31)

This recommendation will promote the achievement of overall Government policy objectives by ensuring that the Department takes into account consistency with other Government policies in the assessment of national interest proposals.

Response

Agreed.

The Department notes that the use of a checklist of factors which might be relevant to the consideration of national interest proposals was recommended by the IDC, which reviewed the national interest facility in 1993. This was endorsed by the Government, and a checklist, which is being refined in the light of experience, is now in use. The consultative procedures followed by the Department are

designed to ensure that relevant Government policies are taken into account in the assessment of proposals.

ANAO comment

The audit report (paragraphs 2.26 and 2.30) refers to the

Department’s recent introduction of the checklist of factors which might be relevant considerations in the assessment of national interest proposals . The ANAO supports that initiative. It also mentions that consideration of proposals by an IDC comprising relevant government

departments helps ensure that consistency with other Government policy objectives is taken into account in the assessment process.

The ANAO recommendation that significant Government policies and industry and economic strategies, as well as the capacity of exporters to provide product support by way of spare parts, servicing and maintenance, be included in the checklist is intended to further ensure that these factors are not overlooked, but are considered by the

Department in the assessment process. A more comprehensive checklist should improve the assessment of national interest proposals.

The ANAO recommends that the Department incorporate in the checklist all prominent specific risks and assess them in each proposal. (2.35)

The recommendation seeks to ensure that all relevant risks or categories of risk are included in the checklist.

Response

Agreed.

The Department believes that all relevant risks are taken into account in the assessment of proposals. However, risk factors will be included in the checklist as recommended by the ANAO.

No.4 The ANAO recommends that the Department, in consultation with EFIC, consider providing specific cover for specific non-payment risks or categories of risk where appropriate for particular national interest proposals, instead of providing general cover against all non-payment risks. (2.39)

Underwriting would be more closely attuned to the level of each specific category of risk.

Response

Agreed.

To the extent that it is appropriate, selective cover has always been a normal part of EFIC’s operations and national interest approvals. However, the range of risks against which cover is provided has to be appropriate to the particular transaction and sufficient to enable the export to proceed. For many exporters the ability to self-insure is very limited and full cover is needed. The accumulation of even relatively small levels of extended-term credit exposure on an exporter’s balance sheet can seriously impair its capacity to undertake ongoing business.

ANAO comment

The ANAO recognises that exporters usually will require insurance cover to proceed with export proposals, especially to risky markets. However, there may be circumstances where it is only certain specific non-payment risks which require national interest cover; and the other risks might be underwritten on EFIC’s commercial account or partly carried by the exporter. The provision of specific national interest cover for specific non-payment risks in such circumstances would limit the Commonwealth’s underwriting (and also might reduce the surcharged premiums payable by exporters). While the ANAO accepts that general cover is likely to be provided for most national interest proposals, the ANAO considers that there should be more active consideration of the insurance cover options for particular proposals.

No.5 The ANAO recommends that the Department request EFIC to

have regard to the checklist in determining which national interest proposals to refer to the Minister and what information to provide, and in assessing national interest proposals for performance bonds and working capital guarantees that EFIC is authorised to issue. (2.42)

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Reference to the checklist by EPIC would assist in ensuring consistency in the referral, assessment and approval of national interest proposals. It would also help ensure that EPIC provides comprehensive information about proposals which the Department assesses and puts to the Minister.

Response

Disagreed.

The Department does not consider it appropriate for EPIC to attempt to prejudge the national interest in determining what proposals to refer to the Minister. In all cases EPIC satisfies itself that the

commercial elements of the transaction are sound before reference to the Minister, and it should continue to do so; however, EPIC is not in a position to decide whether a particular transaction would be in the national interest.

The Minister has determined that, for transactions falling within the guidelines which he has issued to EPIC, it is in the national interest to provide working capital guarantees and bonding facilities. Where a proposed transaction meets those guidelines EPIC is unable to decline to provide support. It makes no judgment on the national interest.

ANAO comment

In the case of national interest proposals which the Department puts to the Minister with a recommendation on whether to approve them, the ANAO considers it important that all the parties involved in the process of referring and assessing the proposals are aware of factors that may be relevant considerations in the assessment process. EPIC in particular plays a significant role in providing the Department with relevant information on individual loan proposals, including details of the exporter, buyer/borrower, the project, indemnity arrangements and loan features. The IDC review of the policy aspects of the national interest facilities sought to enhance EFIC’s role in the process. As noted in the audit report (paragraph 4.6), the IDC recommended that EPIC provide an assessment of each proposal, including the economic and political risk, and reasons for referring proposals for national interest consideration. In the ANAO view, such advice should be framed in terms of the factors to be considered

in the assessment process.

In the case of performance bonds and working capital guarantees, EPIC may issue them on the national account without referral to the Minister where proposals are within Ministerial guidelines. The audit report (paragraph 2.40) notes that those guidelines do not specify any of the national interest factors that generally are relevant

considerations in assessing proposals for the other types of national interest facilities. The ANAO considers that EPIC should have regard to the checklist of national interest considerations applying to the assessment process for cases referred to the Minister. Without

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such a process, there is no requirement to demonstrate that Commonwealth underwriting of the performance bonds and working capital guarantee proposals promotes national benefits other than to the exporter or the exporter’s bank. There is also inconsistent treatment in the different types of national interest proposals.

Monitoring outcomes of supported proposals

No.6 The ANAO recommends that the Department check that projected national benefits that were considerations in its recommendations to the Minister are achieved. (2.47)

Monitoring outcomes would assist in evaluating the achievements of the facilities other than receipt of payment for the exports and in developing policy for their long-term operation.

Response

Agreed.

The Department recognises the value of monitoring outcomes of the national interest export facilities and accepts the recommendation. It notes, however, that although short-term benefits such as employment or the value of the exports generated (where approvals lead to contracts being secured by exporters) are readily assessable, several years often elapse between approval and contract completion. Even more time may need to pass before some longer term benefits are achieved.

ANAO comment

The ANAO notes the Department’s acceptance of this

recommendation. Although the Department mentions that there may be an extended period before the achievement of longer term benefits of exports supported under the national interest facilities, the ANAO believes that such evaluations can commence now. The facilities have been operating for many years and the longer term outcome of

Commonwealth underwriting of exports assisted should now be assessable.

Notional accounts on financial results

No.7 The ANAO recommends that the Department:

(a) improve the transparency of the national interest account through the development of a cumulative notional account as endorsed by Ministers and in accordance with the requirements of the subsidies code of the GATT

(b) propose to the Minister that the notional account be available for the information of the Parliament and the public, and

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(c) consider whether underwriting and premium rate strategies need to be changed in the light of the financial result disclosed by the notional account. (3.25)

The recommendation will provide more useful information on the financial results of the national interest facilities. This will assist the Department to review performance, report publicly on results and set future underwriting strategies for the facilities.

Response

(a) Agreed in principle.

(b) and (c) Noted. The Department sees these as policy matters for the Government.

The Department is addressing the development of notional accounts. It notes that the concept of notional accounts predates the preparation by EPIC of financial statements on an accrual basis and the Department’s impending shift to accrual accounting. The Department also notes that notional accounts raise a number of difficult concepts, for example, notional investment income on premiums paid into the Consolidated Revenue Fund, notional capitalisation, treatment of unrecovered claims, rescheduled debt and debt forgiveness. These

matters may bear upon the applicability of notional accounts.

The Department notes that the GATT subsidies code does not require financial reporting, nor is there an internationally accepted interpretation of the GATT requirement which takes account of the effects of the debt crisis and multilateral debt relief arrangements incorporating long-term rescheduling and debt forgiveness. The OECD is currently developing guiding principles for setting premiums, related conditions of cover and a common understanding of the requirement to meet long-term operating costs and losses (i.e.

the GATT obligation). The OECD has set itself a target of mid 1995 to complete this work.

Underwriting and premium rate strategies were addressed in the 1993 IDC review. The IDC’s preferred approach, that national interest premiums be determined by applying a variable surcharge to EFIC’s risk-based premium rates, was endorsed by the Government. The Department does not envisage a further review of the current policy until the OECD has completed its task. The Department believes that unilateral action by Australia in advance of the OECD’s work could jeopardise the competitiveness of Australian exporters and the

progress of the OECD work.

ANAO comment

The ANAO notes that the Department agrees in principle with part (a) of the recommendation, but sees parts (b) and (c) as policy matters for the Government. The ANAO considers that the Department

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should address these issues, as part of its policy advising

responsibilities to the Minister.

The audit report (paragraph 3.23) refers to the recommendation of the 1993 IDC review that a cumulative notional account be prepared for the national interest facilities and the Government endorsement of the IDC report in 1994. In making the recommendation for the preparation of the notional account, the IDC had been aware of existing arrangements for reporting the national interest account as part of EFIC’s accounts.

Following EFIC’s establishment in November 1991, its 1991-92 financial statements were prepared on an accrual basis, although income and expenses arising from national interest transactions were

reported separately on a cash basis. The 1992-93 statements presented an aggregation of transactions on the national interest account and commercial account. It is not apparent to the ANAO that this development affected the need for a notional account.

As noted in the audit report (paragraph 3.13), the notional account should cover the national interest account as well as EFIC’s commercial account operations, to indicate whether Australia is meeting its obligations under the subsidies code of the GATT that these facilities pay their way over time.

A separate notional account needs to be prepared for a number of reasons. Firstly, it would serve a specific and distinctive purpose: to present information on Australia’s government-supported export credit operations in accordance with the GATT requirement. This purpose differs from the purposes of the financial statements of the Department and EFIC. Secondly, it would report on the totality of the national interest account and commercial account facilities, whereas the financial statements of the Department and EFIC are intended to report on the transactions of each of those entities in relation to national interest or commercial account facilities. Related to this, the parameters for measuring and reporting on cumulative financial results would be specific to the notional account and may not correspond to those applying to the financial statements of the two entities.

Reference is made in the audit report (paragraph 3.19) to the Department’s view that there is at present no internationally accepted interpretation of the provision of the GATT subsidies code and that the issue of compliance with the GATT requirement is the subject of a multilateral review. The ANAO considers that this recent international development does not obviate the need for the Department to proceed with preparation of the notional account. It is important for the Department to know whether Australia has been meeting the longstanding requirement for its export credit facilities to pay their way over time. If the multilateral review leads to revised requirements for measuring long-term operating costs and losses of

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such facilities, the Department can then modify the affected parameters of the notional account.

The audit report (paragraph 4.7) also refers to the introduction of differential surcharges on premiums for national interest transactions. The AN AO view is that the Department would need to consider adjusting current premium rates, as it did in 1992, if the proposed

notional account indicates that they are not sufficiently high to ensure that the facilities pay their way in accordance with the GATT requirement. It is not clear to the ANAO how such a review might severely harm the competitiveness of Australian exporters and the

progress of the multilateral review, as claimed by the Department.

No.8 The ANAO recommends that the Department prepare separate

management accounts for each of the main categories of national interest products. (3.27)

Separate management accounts would enable more detailed assessment of the relative performance of each product and would provide a basis for review of the appropriateness to each product of the premium and fee structures used.

Response

Agreed.

Separate management data for each of EFIC’s product categories covered on the national interest account can be provided by EPIC to the Department. The financial situation in relation to each product is known.

ANAO comment

The quarterly reports on the national interest account that the Department receives from EPIC show the level of exposure for the main categories of national interest products (credit and political insurance, overseas investment insurance, loans, performance bonds and working capital guarantees). Plowever, other financial data, such as premiums, are not reported for each product category. This

information would be needed to enable the Department to assess the relative performance of each product and to review the

appropriateness of their premium and fee structures.

Linkage to other policies

No.9 The ANAO recommends that the Department consider adopting

longer term strategies to assist in the achievement of other Government policies by introducing graduated variations to underwriting conditions over a number of years. (4.32)

Assistance would be provided towards the achievement of other Government objectives in the long term (such as industry reform, adding value to natural resources, ecologically sustainable

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development, etc.) and gradually reduce the reliance on public funds for underwriting risk.

Response

Agreed in principle.

The Department notes that, where appropriate, the Government does use the national interest facility to support wider policy objectives. However, in most instances proposals referred to the Minister for

national interest consideration are one-off export opportunities. Ultimately, strategic use of the national interest facility is a policy matter for the Government.

ANAO comment

The audit report (paragraph 4.19) canvasses the desirability of varying underwriting conditions over time to assist in achieving the objectives of broader Government policies. In particular, it considers

the case for reducing insurance cover on low grade wheat exports to more risky markets, to encourage the wheat industry to produce higher grade wheat for less risky markets.

The Departments of Industry, Science and Technology, the Treasury and Primary Industries and Energy indicated that they did not support such an approach to industry reform for the wheat industry. Mention was made of the difficult international trading environment in which Australian wheat exports must compete, the susceptibility of Australian wheat output and quality to unfavourable seasonal weather conditions and the limited effect of reduced national interest cover on wheat exports as a market signal to growers.

While recognising the cogency of these arguments, the ANAO remains of the view that further consideration should be given by the Department to longer term strategies using national interest cover to promote broader Government policy objectives. Credit insurance for

wheat exports necessarily should be part of that consideration, as the wheat industry has been the major long-term beneficiary of the national interest facilities and large defaults previously have been associated with national interest wheat credit sales.

Management information systems

No.10 The ANAO recommends that the Department prepare annual statistics on the particulars of cases processed and improve the format of the national interest case register by including:

• a separate case number series for insurance proposals, loan proposals and other proposals subject to approval by the Minister, with separate sections in the register for each category

• information on cases approved, cases rejected, cases where contracts are won and cases which are not activated, and

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No.11

N o . 12

• details of the submission, approval and payment of claims for cases where claims are made. (5.7)

Availability of basic statistical information on a regular basis in respect of proposals would assist in monitoring the operation of the facilities.

Response

Agreed.

The Department will prepare annual statistics on the basis proposed by the AN AO. At the same time, the Department notes that this type of basic data is available when required and has been adequate to

enable proper monitoring of the operation of the facility.

It is the Department’s view that key management information comprises that relating to country exposure, the nature of contingent liabilities, outstanding claim payments and debt recovery prospects.

Detailed data on these matters are maintained.

The ANAO recommends that the Department take steps to define the requirements of its computer-based systems for the national interest facilities and complete the development of those systems as soon as practicable. (5.9)

Prompt development of the computer-based systems would enhance the availability of management information.

Response

Agreed.

The Department is investigating the cost-effectiveness of options to improve its computer database of national interest transactions.

The ANAO recommends that the Department seek additional information from EFIC that would enable improved operational management information to be provided, including:

• particulars of movements in the annual balances of debtors, creditors, contingent liabilities and loans

• age analyses of debts

• separate annual and cumulative profit/loss figures for each product category, and

• annual and cumulative statistics of exports generated. (5.10)

The information would provide a basis for more informed management of the facilities and policy advice to the Minister.

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Response

Agreed.

EFIC is already providing all the management information required by the Department, including most of that suggested by the ANAO.

ANAO comment

The ANAO notes recent action taken by the Department to obtain additional management information from EFIC.

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1. National Interest Export Finance and Insurance

Chapter 1 outlines the legislative basis fo r the national interest facilities, describes the roles of the Department and the Export Finance and Insurance Corporation (EFIC) in its administration and provides financial information on the operation o f the facilities.

Introduction

1.1 Under national interest export finance and insurance arrangements, liabilities arising from the provision of national interest facilities to exporters are borne by the Commonwealth.

1.2 These Commonwealth-supported facilities are provided by the Export Finance and Insurance Corporation, which was re-established as a separate statutory corporation under the Export Finance and Insurance Corporation Act 1991. Prior to November 1991 EFIC

operated as part of the Australian Trade Commission. The specialised services are provided to help increase Australian exports and include a range of insurance, guarantee and finance products not normally available from the private sector for the risk categories involved. Assisted exports range from traditional commodity exports

such as wheat and wool to capital goods and services. The EFIC function has operated since 1956.

The national interest provisions of the Act

1.3 National interest export facilities were introduced by legislation in 1961 and have been continued in subsequent legislation to the present Act. National interest proposals tend to be in the high risk markets where private sector and EFIC commercial operations are unwilling to provide support.

1.4 Under the national interest provisions EFIC may refer to the Minister for Industry, Science and Technology applications for insurance, indemnity, guarantees and loans that it is unwilling to accept on its own account. The Minister may approve of EFIC

entering into a contract covering such a proposal if the Minister is satisfied that it is in the national interest. When approved, EFIC then has the right to elect to carry a portion of the risk on its own account.

1.5 Proposals are normally referred by EFIC to the Minister where the risk of non-payment is unacceptable to EFIC, where the transaction is too big for it to finance, or where the transaction would affect its balanced risk portfolio.

1.6 In considering proposals, the Minister consults other Ministers where appropriate. In cases where there are large exposures or where important policy issues are involved, proposals are referred to the Government.

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1.7 In respect of wheat exports, a credit sales program that includes exports for which national interest cover is likely to be sought is submitted annually for approval in principle by the Government. For national interest wheat exports, formal approval is sought from die Minister as individual sales are concluded under the agreed program.

1.8 Separate arrangements apply to two categories of national interest export facilities: performance bonds and export working capital guarantees. Where proposals are within Ministerial guidelines, EFIC issues the bonds or guarantees and covers all or part of the risk on the national interest account without referral to the Minister.

The role of the Department

1.9 The national interest provisions are administered by the Export Credit Policy Section of the Department of Industry, Science and Technology, which provides advice and recommendations to die Minister on individual proposals after considering the views of an IDC comprising relevant government departments. The Department also provides advice to die Minister on related policy issues.

1.10 EFIC provides technical advice and undertakes all contractual and servicing arrangements in respect of the national interest facilities.

Types of national interest facilities and value of new business

1.11 National interest export facilities involve significant support for exporters. During 1992-93 the volume of exports assisted under the national interest provisions totalled $237m, down from $586m the previous year. This compares with $4.7b on EFIC’s commercial

account in 1992-93, an increase of $476m over the previous year.

1.12 There are five main types of national interest facilities, with export credit insurance accounting for the largest share of the facilities. Table 1.1 sets out the main types and the value of new business in 1992-93.

1.13 The wheat industry historically has been the major exporter assisted under the facilities, although its relative share has reduced in recent years. The range of export proposals receiving national interest support has included the installation of telecommunications systems, provision of meat processing facilities, airport construction and supply of vessels.

1.14 Further details of EFIC new national interest insurance and loan business, as well as performance bond and working capital guarantee operations on the national interest account for 1992-93, are set out in Appendix 1.

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Table 1.1

Types of national interest facilities and value of new business, 1992-93

T ype Value of

new business

%

E x p o rt C re d it I n s u r a n c e In su ran c e fo r A ustralian ex p o rters a g a in st com m ercial, political and e x c h a n g e tr a n s f e r risks of non p ay m en t fo r g o o d s and serv ic e s sold to o v e rs e a s p u rch asers.

$16 8 m 70

O v e r s e a s I n v e s tm e n t I n s u r a n c e In su ran c e fo r A u stralian in v esto rs a g a in s t political c a u se s of loss of p ro p erty an d inability to tr a n s fe r

in v estm en t e a rn in g s or return c a p ita l to A ustralia.

$ 11m 5

E x p o rt F in a n c e F inan ce to o v e rs e a s p u rch a s e rs to a ss is t A ustralian ex p o rters of c a p ita l g o o d s and re la te d services. $27m 11

P e r f o r m a n c e B o n d s G u a ra n te e s to o v e rs e a s p u rch a s e rs in re s p e c t of A ustralian ex p o rters' p erfo rm an ce on c o n tr a c ts fo r th e

s u p p ly of c a p ita l g o o d s o r services.

$31m 13

W o rk in g C a p ita l G u a r a n te e s G u a ra n te e s to b a n k s of A ustralian e x p o rters fo r th e w orking cap ital required to p erform export c o n tra c ts . $2m 1

S o urce: EFIC A nnual R eport 1992-93

Financial reporting and accounting arrangements

1.15 Under the Act EFIC is required to keep separate accounts of national interest contracts, guarantees and loans that relate to the liability to be borne by the Commonwealth.

1.16 Particulars relating to national interest operations are disclosed in the modified cash basis financial statements of the Department and in EFIC’s accrual-based financial statements.

1.17 Financial information in respect of premiums received, claims paid, contingent liabilities, outstanding debts and recoveries is summarised in the following paragraphs. This information is mainly derived from die Department’s financial statements.

Premiums

1.18 Receipts in respect of national interest premiums and fees are payable by EFIC to the Department for credit to the Consolidated Revenue Fund (CRF). Administrative costs incurred by EFIC in

3

respect of national interest contracts and guarantees are met by the Commonwealth.

1.19 National interest premiums and fee receipts from 1 July 1987 to 30 June 1994 totalled $81m (see Table 1.2). The amounts shown for premiums are net of administrative costs deducted by EPIC.

T a b le 1.2

N a tio n a l i n t e r e s t r e c e ip t s and c la im s 1 9 8 7 - 8 8 to 1 9 9 3 - 9 4

Year Premium and fee

receip ts (net of

adm inistrative c o s ts d ed u cted by EFIC) paid to CRF

Claims paid

Paym ent from EFIC borrow ings

(see note)

Paym ent by D epartm ent

T otal claim pay m en ts

$m $m $m $m

1987-88 10 3 08 9 3 1 7

1988-89 19 12 9 21

1989-90 21 4 4

1990-91 8 2 3 4 2 3 4

1991-92 12 122 2 56 378

1992-93 5 250 59 3 09

1993-94 6 63 14 77

T otal 81 755 585 1340

Source: D ep artm en tal finan cial s ta te m e n ts an d inform ation provided by EFIC N ote: Figures sh o w in g claim p ay m en ts from EFIC borrow ings a re indicative only. Claims paid in $US from EFIC

borrow ings from 1887-88 to 1 8 9 2 -9 3 have been converted to $A a t th e ra te of US 71 c e n ts to $A1.

Claims

1.20 Amounts necessary to discharge liabilities for claims are payable to EFIC by the Department from the CRF. The

Commonwealtli meets the claims in two ways.

4

1.21 The Department may pay to EPIC amounts needed to discharge the liabilities. Alternatively, the Minister may direct EPIC to seek the approval of the Treasurer for EPIC to borrow the amounts necessary to discharge them. In these cases the Commonwealth’s obligations are met off-budget, and the obligations to pay EPIC for

national interest claims are replaced by a Commonwealth liability to pay EPIC the amount needed to discharge the borrowings and all costs, including interest, incurred by EPIC in connection with the borrowings.

1.22 Borrowings by EPIC have been used to pay claims in cases where there is considered to be a reasonable prospect of recovery of the subrogated debts or where debt rescheduling agreements have been reached or are likely to be accepted.

1.23 Since 1 July 1987 national interest claims in excess of $1.3b have been paid. The largest claims have related to credit sales of wheat and other primary products exported to Iraq, the former Soviet Union and Egypt.

1.24 As shown in Table 1.2 the Department has paid $585m of total claims, while approximately $755m has been paid from EPIC borrowings.

Contingent liabilities

1.25 Contingent liabilities in respect of Government exposures to payment risks related to national interest loan and insurance contracts at 30 June 1994 totalled $ 1105m. This comprised $461m exposure for payment risks associated with the national interest facilities

and $644m representing amounts needed to discharge EPIC borrowings to meet claims paid. The level of contingent liabilities at the end of the financial years 1990 to 1994 is shown in Figure 1.1.

Subrogated debts

1.26 Amounts recoverable in respect of paid claims are raised as subrogated debts against defaulting purchasers. Recoveries are followed up by the Department and EPIC with assistance from the Department of Foreign Affairs and Trade and other departments. Recoveries repaid to the Department by EPIC are credited to the CRF.

1.27 National interest outstanding debts as at 30 June 1994 totalled approximately $1.2b. This included $567m owed to the Department representing claims met by the Commonwealth. The level of outstanding debts at the end of the financial years 1990 to 1994 is shown in Figure 1.2.

5

National interest contingent liabilities 1990 to 1994

C o n t i n g e n t Liability $m

2 0 0 0

Liability for EFIC borrowings to meet claims paid

Exposure for payment risks as sociated with the national interest facilities

Source: D ep artm en tal finan cial s ta te m e n ts

Note: A m ounts relatin g to EFIC borrow ings to m eet claims paid, w hich w ere disclosed as 'cre d ito rs ' a t 3 0 J u n e 1 991, 1992

and 1 993 are sh o w n here as co n tin g en t liabilities in line w ith cu rren t d e p a rtm en tal accou nting trea tm en t.

1.28 The bulk of the outstanding debts relate to Egypt and Russia, whose repayments are the subject of multilateral debt rescheduling arrangements, and to Iraq, whose debts are subject to the effect of United Nations economic sanctions.

1.29 Amounts received by the Department from EFIC for national interest recoveries since 1 July 1987 are shown in Table 1.3. Recoveries credited to CRF totalled less than $4m.

6

Figure 1.2

National interest outstanding debts 1990 to 1994

1 5 0 0

1 2 7 8

1 21 1

1 000

3 0 J u n e 1 9 9 0 1 9 91 1 9 9 2 1 9 9 3 1 9 9 4

Total unrecovered su b r o g a te d d e b ts arising from claim p a y m e n ts

I I Debt ow ed to the Department representing claims met by the Com mon we alth

I— I Debt representing claims funded by EFIC borrowings and w h o s e r e p a y m e n ts are the subject of 1 debt rescheduling arra n g em en ts

Source: D ep artm en tal financial s ta te m e n ts and inform ation provided by EFIC N ote: A m ounts rep resen tin g to ta l unrecovered s u b ro g a te d d e b ts arising from claim p a y m e n ts w e re disclosed as 'receivables'

a t 3 0 J u n e 1 9 9 0 , 1991, 1 992 and 1993. Due to a ch an g e in d e p a rtm en tal acco u n tin g tr e a tm e n t, ‘receivables’ disclosed

a t 3 0 J u n e 1 9 9 4 only sh o w e d th e am ount ow ed to th e D epartm ent for claim s m et by th e C om m o nw ealth.

7

Table 1.3

National interest recoveries 1987-88 to 1993-94

Year N ational in terest recoveries

credited to CRF $m

1 9 8 7 -8 8

1 9 8 8 -8 9 3 .3 8

1 9 8 9 -9 0

1 9 9 0 -9 1

1 9 9 1 -9 2 0 .1 3

1 9 9 2 -9 3 0 .0 5

1 9 9 3 -9 4 0 .3 7

Total 3 .9 3

Source: D ep artm en tal financial s ta te m e n ts

Interdepartmental committee review

1.30 In December 1991 the Government requested that an IDC review the policy aspects of the national interest facilities, including the assessment of risk exposure.

1.31 The IDC reported in January 1993. In the conclusion to its report the IDC said it recognised that the national interest could be determined only by Ministers and accepted that it was impracticable to attempt to establish definitive eligibility criteria. At the same time, it found that a number of improvements could be made to existing arrangements. The principal areas of attention were:

• establishment of a checklist of national interest considerations to be addressed in the examination of proposals

• improved transparency in the presentation of information on the operation of the national interest account through the development of, and regular reports to Ministers on, a cumulative notional account

8

• continuing use of exposure ceilings on a selective basis to meet particular market circumstances and objectives, and

• a greater differentiation of risk in the pricing of national interest cover and mandatory information requirements from EFIC on the assessment of risks and the reasons for referring proposals for national interest consideration.

1.32 The IDC’s report was sent to the Prime Minister and other Ministers in June 1993. After general agreement to the conclusions, the Prime Minister agreed in February 1994 that the proposed changes be implemented.

1.33 At the time of audit the Department was implementing the checklist of national interest considerations and risk surcharges for national interest cover. However, it believed that moves by EFIC and the Department to accrual financial statements might meet the

intention of the cumulative notional account proposal (a view that the ANAO does not share). Further reference to changes to the national interest arrangements suggested by the IDC are included in later sections of the audit report.

Objectives, scope and conduct of the audit

1.34 The objectives of the audit were to assess the economy, efficiency and effectiveness of the Department’s management of the facilities, including the processes for assessment of individual proposals, the making of recommendations to the Minister and the development and provision of policy advice to the Minister. The audit examined procedures for monitoring outcomes, development of underwriting and premium policies and strategies, preparation of

management information and compliance with the EFIC Act and other Commonwealth legislation. The audit reviewed only the Department’s operations, not those of EFIC. (Efficiency audits of Government Business Enterprises cannot be conducted by the ANAO without a request from the relevant Minister.) Action taken by the Department, EFIC and other departments in respect of the recovery of subrogated debts also was not included in the audit.

1.35 The ANAO began a preliminary study of the facilities in July 1993 and sent a discussion paper on the study to the Department in November 1993. It was discussed with departmental officers during December 1993. The efficiency audit was designated in

February 1994.

1.36 A discussion paper on audit findings was sent to the Department in April 1994. The Department responded in writing in May 1994 and discussions were held later that month. The Department received legal advice in June 1994 in relation to a number of matters raised by the ANAO. A draft of the proposed report of the audit was sent to the Department in July 1994 for comment.

9

1.37 The formal proposed report was provided to the Department in August 1994. Because of the references to EPIC and the IDC on national interest exports, a copy of the proposed report was sent to EPIC and each member of the IDC for any comments they might wish to make. The Department responded in September, October and November 1994. Comments were also received from the Departments of Primary Industries and Energy, the Treasury and Finance.

1.38 The audit was performed in conformance with ANAO Auditing Standards and cost approximately $213 000.

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2. Assessment of National Interest Proposals

Chapter 2 examines the departmental processes for assessing national interest proposals, including the range o f factors considered by the Department in making recommendations to the Minister. It also examines the monitoring o f outcomes by the Department.

Introduction

2.1 The Department considers proposals referred by EPIC and prepares submissions to the Minister with recommendations on whether to support the proposals in the national interest.

2.2 In considering proposals, the Department seeks the views of a standing IDC comprising the Departments of Finance, the Treasury, and Foreign Affairs and Trade. The Department consults with the Department of Primary Industries and Energy on commodity trade

and mining projects, as well as other departments with an interest in particular proposals.

2.3 The Department’s submissions to the Minister usually contain an outline of the proposal, including any relevant background information concerning the exporter, the purchaser and the export product, together with appropriate financial details of the proposal.

Submissions also provide a summary of the views of IDC members and the risks associated with the proposal. The Department’s submissions are not available to the IDC.

2.4 The Minister may consult with other Ministers or refer to the Government those proposals that involve large exposures or unusual features. Proposals referred to the Government are the subject of submissions that are more comprehensive than departmental submissions to the Minister and contain more detailed coordinating

comments from all relevant departments. In some of these cases the decisions are in principle and the Minister then considers individual export proposals as they arise.

2.5 Under section 27 of the EFIC Act the Minister may approve of EFIC entering into a contract of insurance, making a loan or giving a guarantee if the Minister is satisfied that the proposal is in the national interest. Cases referred by EFIC are generally supported by

the Department and approved by the Minister. The names of the parties to national interest insurance and guarantee transactions are not disclosed publicly.

The assessment process

2.6 The national interest provisions were introduced by the Export Payments Insurance Corporation Bill 1961. The then Minister (Mr McEwen) said in his second reading speech (Elouse of Representatives, Hansard, 13 April 1961, pp. 823-824) that the Act

11

would deliberately not attempt to define what would constitute the national interest. He indicated, however, some important considerations that would influence the Government in deciding whether cover should be granted to a transaction on national interest grounds.

2.7 The considerations were whether:

• the proposition holds promise of opening up worthwhile new export markets for Australian products

• an industry with high export potential would be stimulated

• the transaction was important for a particular Australian area or industry from the point of view of development, and

• the transaction would confer some obvious and significant benefits for Australia’s trade relations with the country concerned.

2.8 He stated that EFIC’s predecessor would refer to the Minister the cases which it could not accept as part of its normal business, for such reasons as the need to observe a spread of risks between markets or the payment terms of particular transactions, in terms of the size of the proposal and the market concerned. Each case would be examined and considered on its merits, to see whether there were circumstances justifying acceptance on national interest grounds.

2.9 The AN AO is not aware of any subsequent statement to the Parliament revising the 1961 advice. Successive governments have continued to keep the meaning of national interest undefined in the legislation.

2.10 In 1993 the IDC report on policy aspects of the national interest facilities (paragraph 1.30 above) noted that Australian Governments have decided it was not practicable to attempt to specify criteria to cover all the factors that may be relevant to a particular case, as a wide range of considerations was often involved. The report recognised that the national interest can only be determined by Ministers after consideration of all the relevant factors pertaining to a

particular transaction.

2.11 Against that background, the ANAO reviewed the Department’s assessments relating to a sample of national interest proposals submitted to the Minister in 1992 and 1993.

Quality of departmental assessments

2.12 It was not always evident from the documentation on file what factors had been considered in the Department’s assessment of each proposal and therefore whether all relevant factors had been considered and assessed. There was little documentation of the assessment other than the submission to the Minister. In the ANAO view, the use of a comprehensive checklist of national interest

12

considerations would help ensure that all relevant issues were addressed in departmental assessments (see paragraph 2.25 below).

2.13 The Department’s submissions implicitly considered it to be generally in the national interest for a proposal to proceed if it would achieve exports and the risk of non-payment was acceptable. The Department’s assessments focused largely on risk of non-payment.

2.14 The ANAO noted that this was consistent with the Department’s view of the purpose of the national interest facilities. The

Department advised that the national interest facilities need to be considered against the background of the EPIC Act, which established EPIC for the purpose of facilitating and encouraging export trade by providing insurance and financial services. The Department considers

that in most instances the conclusion of successful export contracts will further a wide range of Government policy objectives which serve the national interest. Accordingly, the Department’s disposition is to recommend in favour of proposals where it considers the

payment risk to be acceptable and after taking account of other factors. In some instances the national interest could be served even in the face of expected financial losses. The Department noted that under the Act the decision to provide national interest support rests with the Minister.

2.15 The ANAO agrees that achieving exports that are paid for would be a major consideration in most circumstances. However, cases referred for national interest are generally referred because the risk of non-payment is too great for commercial underwriters or

EPIC, given the prudential constraints under which it is required to operate. It could be argued, therefore, that the Department should consider all relevant factors and weigh up all the benefits and risks when forming a recommendation that it would be in the national

interest for public funds to be risked. This would be so even where the Department’s assessment is that there is a good chance that payment will be received.

2.16 Most submissions to the Minister referred to some relevant factors other than the risk of non-payment but some failed to explain clearly how the national interest would be served by supporting the proposal. They did not make it clear what benefits were expected to

be achieved for Australia.

2.17 Set out at the end of tliis chapter are several case studies of approved national interest proposals where in the ANAO’s opinion the Department’s submissions did not make a reasonable case for support in the national interest. The first case study (Case N °l), however, is an example where the submission more clearly identified national interest benefits from the proposal.

2.18 The submissions that the ANAO looked at did not use the 1961 considerations (paragraph 2.7 above) as a starting point. Few of the submissions would come within those considerations. In the ANAO

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view the 1961 statement is important because it was the only occasion on which the Parliament was given any indication of the

considerations that might influence the approval of national interest proposals. The Parliament, which appropriates the funds to meet national interest claims, has not been told that those considerations are no longer important and that approvals may be given simply to facilitate and encourage exports in circumstances unattractive to EPIC. If the facilities are to be as wide as that, it should be made known publicly so that a wider range of exporters may pursue higher

risk export possibilities and obtain Commonwealth underwriting support.

2.19 The EPIC Act provides that the Minister may give approval only if he is satisfied that a proposal is in the national interest. Accordingly, the Department in its submission on the proposal should itself set out a case that would satisfy a reasonable person that it would be in the national interest to support it. The submission should bring out the merits of the proposal and make it clear that, apart from benefiting the exporter, it would benefit the nation by achieving some national purpose. In view of the exposure of public funds which may have to meet exporters’ claims in the event of non-payment, the ANAO considers that a national interest approval requires a higher test than facilitating and encouraging exports in risky and uncommercial circumstances. And the greater the risk the greater is the need for justification in the national interest.

Departmental comment

2.20 The Department did not agree with most of the ANAO observations on the quality of departmental assessments of national interest cases. It stated that its practices do involve consideration of all relevant factors and mentioned that it is now using a checklist recommended by the IDC as a way to document the process.

2.21 The Department did not accept that few submissions would come within the 1961 considerations. Its view was that most, if not all, national interest proposals would contain some of those considerations as well as many other elements which might influence a national interest decision. The Department added that the 1961 considerations were not intended to be definitive and that those considerations, together with a wide range of other factors, including

the impact of proposals on the balance of payments, remain relevant and important.

2.22 The Department accepted the need to identify more explicitly in its submissions the potential benefits for national interest proposals. It also considered that a successful export contract will benefit both

the nation and the exporter and with few exceptions would be consistent with a wide range of Government policy objectives.

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ANAO comment

2.23 The Department’s claim that all relevant considerations are addressed in considering proposals can best be substantiated by improving the documentation on file of its assessment of each proposal. If there are additional factors besides the 1961

considerations that the Department generally takes into account in recommending approval of national interest proposals, those factors should be made known to the Parliament. With respect to the Department’s comment that a successful export will benefit both the

nation and the exporter, the ANAO remains of the view that Commonwealth underwriting of a proposal in the national interest should involve tangible and demonstrable benefits to the nation, not just the exporter. Departmental submissions need to articulate those

benefits.

Recommendation N°1

2.24 The ANAO recommends that the Department:

(a) propose to the Minister that the Government clarify the purpose of the national interest export facilities in a public statement that confirms the 1961 considerations or explains that other considerations are now relevant in assessing proposals, and

(b) set out in its submission on each proposal an assessment that shows clearly how it satisfied itself that it would be in the national interest to risk public funds by approving it.

Use of a checklist

2.25 To justify a recommendation of support in the national interest all relevant factors should be included in deliberations. The use of a comprehensive, though not exhaustive, checklist of important considerations would assist that process.

2.26 The IDC report recommended the use of a checklist of national interest factors in the assessment of proposals. During the early stages of the audit the ANAO was advised that the Department was using the IDC’s checklist as a guide. These factors have not been

announced publicly. The checklist outlined the following factors that the IDC considered would often be balanced against the payment risk:

• potential contribution to national income

• whether the transaction would create significant benefits for Australia’s trade or political relations with the country concerned

• whether a proposal holds promise of opening up new export markets or making Australian capabilities more widely known

• the importance of establishing or maintaining Australia’s position in a particular market during a period of difficulty

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• whether the transaction is important for a particular Australian region or industry, or has the potential to promote an export culture, and

• the employment effects of the project.

2.27 The IDC also identified the dependence of proposals on concessional export credits from EPIC under the Development Import Finance Facility as a constraining consideration in the assessment process, but this factor was not specifically included in the IDC’s proposed checklist.

2.28 The IDC believed that the checklist should be neither prescriptive nor exclusive. In some cases a single factor could be of predominant or overwhelming importance and in other cases particular factors would not be relevant. Proposal-specific factors not listed might also have a bearing on particular cases; the IDC proposed that those factors be added to the checklist where they were found to have more general application.

2.29 In the interest of better administration of the scheme, the ANAO considered that the checklist should include additional factors which were not specifically expressed in the IDC example such as:

• consistency with other significant Government policies and programs (for example, adding value to natural resources and meeting environmental standards)

• integration with relevant industry and economic strategies (for example, longer term strategies for mainstream exports such as wheat), and

• capacity of the Australian exporter to provide support by way of spare parts, servicing and maintenance to protect the reputation of the exporter and Australia.

2.30 A more comprehensive checklist incorporating additional important factors would provide greater safeguards to ensure:

• all relevant and significant factors for and against the proposal are considered in the Department’s assessment

• risk of conflict with other policies is reduced to a minimum (the ANAO acknowledges that consideration of proposals by IDC members is a factor in reducing this risk), and

• the national interest facilities complement the achievement of the objectives of other Government policies.

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Recommendation N°2

2.31 The ANAO recommends that in the checklist of national interest factors to consider in the assessment of proposals the Department include significant Government policies, industry and economic strategies and the capacity of the exporter to provide support services.

Specific risks

2.32 The current practice is for overall payment risk to be a factor in the consideration of all proposals. EPIC and the Department’s submissions tended to refer to general country risk and the risk of the exporter not completing the project. Specific risks relevant to a proposal were not always identified and individually assessed. These risks may include exchange blockage, armed conflict, political upheaval, breach of environmental standards or major conflict with other Government policies.

2.33 The Department believes that it considers all relevant risks as subsets of the three main risk categories: exporter risk, country risk and project risk, and brings any specific risks of particular relevance to the Minister’s attention. The Department added that with few exceptions national interest transactions involve foreign government buyers and/or guarantees of repayment. This effectively converts the

various risk elements into a sovereign or country risk.

2.34 In the ANAO view, identification, assessment and

documentation of specific risks of each proposal would help to ensure that particular risk elements are fully considered and are not overlooked. It would be appropriate for the checklist to include categories of specific risks.

Recommendation N°3

2.35 The ANAO recommends that the Department incorporate in the checklist all prominent specific risks and assess them in each proposal.

General cover or specific cover

2.36 National interest cover was generally provided for all events that may lead to non-payment for exports rather than for specified non-payment risks; for example, exchange blockage or political risk.

2.37 The Department should consider providing cover for specific non-payment risks or categories of risks where appropriate for particular national interest proposals, rather than comprehensive cover. This may enable the level of indemnity provided to be more

closely attuned to the level of risk involved in each specific category. Further reference to risk sharing through the use of excesses for specific non-payment risks or categories of risk in underwriting is included in Chapter 4 of the audit report.

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2.38 The Department believes that the range of risks against which cover is provided has to be appropriate to the particular transaction and sufficient to enable the export to proceed. To the extent that it is appropriate, selective cover has been a normal part of EFIC’s operations and national interest approvals.

Recommendation N°4

2.39 The ANAO recommends that the Department, in consultation with EFIC, consider providing specific cover for specific non-payment risks or categories of risk where appropriate for particular national interest proposals, instead of providing general cover against all non-payment risks.

Use of checklist by EFIC

2.40 The ANAO considers that it would be appropriate for the Department to request that EFIC also have regard to the proposed checklist in determining which projects to refer to the Minister and in providing relevant information on those proposals. The checklist would also be useful for EFIC’s assessment of performance bond and working capital guarantee proposals. As indicated in Chapter 1, EFIC may issue performance bonds and working capital guarantees under the national interest provisions without referring individual cases to the Minister. Ministerial guidelines issued for assessing those proposals did not refer to national interest factors such as those identified by the IDC as relevant considerations for national interest facilities.

2.41 Use of the checklist by EFIC would assist in ensuring consistency in the assessment and approval of national interest proposals, including both those referred to the Minister and those decided by EFIC. It would also help ensure that FFIC provides comprehensive information about proposals which the Department assesses and puts to the Minister.

Recommendation N°5

2.42 The ANAO recommends that the Department request EFIC to have regard to the checklist in determining which national interest proposals to refer to the Minister and what information to provide, and in assessing national interest proposals for performance bonds and working capital guarantees that EFIC is authorised to issue.

Publication of approvals

2.43 The EFIC Act requires EFIC to publish in the Commonwealth Gazette particulars of approvals that proceed, but without disclosing the names of the parties to insurance and guarantee transactions. Loan details, where there is a direct relationship between EFIC and the buyer or borrower, are published. The Department relies on

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EFIC to perform this function and assumes that all relevant approvals have been notified in the Gazette.

2.44 In view of the Commonwealth’s underwriting of national interest cases, there could be grounds for publication of the names of the parties involved in all national interest transactions. The Department argued, however, that to disclose to the purchaser that it was a national interest case might prompt the purchaser to refuse to pay, on the grounds that the Commonwealth would recompense the exporter. The ANAO accepted the Department’s view.

Monitoring outcomes

2.45 As mentioned previously, the Department considers the most important outcome is that the export is paid for by the purchaser. The ANAO view is that, as factors other than payment may contribute to recommendations for supporting proposals in the

national interest, the Department should, where practicable, check with the exporter and others that projected outcomes have been achieved. This would provide a measure of evaluation of the success of the facilities and may assist in the development of policy for their

long-term operation.

2.46 Assessing the specific contribution of such projects to the achievement of some national interest benefits could be difficult. Without such assessment, however, it may not be known whether the national interest has in fact been furthered by supporting a proposal.

Monitoring outcomes would also assist the Department to make future recommendations with more confidence where it has been established that similar exports have resulted in satisfactory outcomes.

Recommendation N°6

2.47 The ANAO recommends that the Department check that projected national benefits that were considerations in its recommendations to the Minister are achieved.

Case studies

2.48 As indicated at paragraph 2.17 several case studies of departmental submissions are summarised below.

2.49 In relation to Cases 4, 5 and 6 tire Department advised that where EFIC nominates to carry a share of the risk, this is a clear indication that the risk is considered commercially acceptable. The Department considered that in such cases, the export benefit itself and

the positive effect for the balance of payments can serve the national interest.

2.50 The Department stated that there is also a wide range of other obvious government policy objectives served by successful export contracts of this type which further the national interest. Some of these are the development of a strong export culture within Australian

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business, encouragement of internationally competitive firms, the internationalisation of industry, showcasing of Australian equipment and engineering skills, and employment generation.

2.51 Notwithstanding the Department’s comments, the ANAO examination of national interest cases did not indicate that these policy objectives generally were cited as considerations in departmental

submissions recommending the approval of particular proposals. Nor did the departmental submissions articulate how individual proposals would further such policy objectives for specific sectors of Australian industry or in particular overseas markets.

Case N°1

EPIC referred for national interest consideration an overseas investment insurance proposal for a $28.7m investment in a joint venture to establish and operate a facility in a foreign country. EPIC considered that, in view of its risk portfolio balance, it would not be prudent to carry the full exposure of the proposal. It was willing to take a 30% share of the risk. EPIC also recommended that the Australian investor take an $8m first loss or self-insurance risk on expropriation and war damage cover.

The Department’s submission in May 1993 noted that, in addition to bringing expected benefits in the form of income (mainly dividends) of $35.3m over the first five years, this and related investments were seen as an important initiative in the Australian firm’s strategy to develop an extensive network in

its field in Asia. The firm’s aim was to capture a large share of Northern Hemisphere business by offering an extensive and reliable network throughout Asia.

The ANAO found the Department’s submission in this case to be more comprehensive than most of the others reviewed. Although only a relatively small part of the submission dealt with the merits of the proposal, it did identify potential benefits for Australia’s strategic position in a developing

line of business. Accordingly, that part of the submission set out a reasonable case for support in the national interest.

The Department advised that this case involved the provision of overseas investment insurance. This type of insurance is fundamentally different from the various forms of support for exports and required more detailed explanation than might otherwise be necessary.

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Case N°2

An application for a loan of $A16.7m for a State Government in a foreign country to purchase aeromagnetic survey services and equipment from an Australian exporter was referred by EFIC for national interest consideration because the country risk was unacceptable for EFIC’s commercial account.

The Department’s submission in November 1991 indicated that this proposal had already been considered by die Minister for Overseas Development and approved for an aid grant under the Development Import Finance Facility. In addition, it said that all but 4% of the contract value represented Australian origin professional services and noted that die project would help to alleviate

a serious water shortage in the foreign State. The submission also noted dial two member departments of the IDC did not support the proposal because they considered the high risk of default and debt rescheduling outweighed die benefits. Die third member department considered the proposal had

sufficient developmental and trade promotion benefits to warrant support.

The Department recommended that the proposal be supported. In its comments the Department acknowledged the poor short- and medium-term economic and political prospects for the foreign country but considered die concerns of the two IDC members to be short-sighted. Its view was that the

risk of default under the circumstances tiien prevailing may have no bearing on the country’s capacity to meet payments that would be due in 1996 and 2000 and that contracts signed in 1991 would be unlikely to be caught in a multilateral debt rescheduling.

The Minister’s office sought additional information from the Department on the payment risks and potential for rescheduling associated with this proposal before the decision was taken.

The ANAO coasiders that the submission did not identify the benefits for Australia and in particular did not identify national interest benefits that outweigh the high level of risk that was acknowledged to apply to the proposal. The Department’s view that the prevailing risk of default may not

affect capacity to pay in later years would not seem to justify assessing the project as being in the national interest.

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Case N°3

The proposal involved a loan by EPIC of $US7.2m for a company in a foreign country to purchase a meat processing facility to be supplied by an Australian firm. EPIC had resolved that medium-term finance business with diat country could not be accepted on EFIC’s commercial account at that time

and referred the proposal for consideration wholly in the national interest.

The Department’s submission in September 1992 noted that the IDC expressed reservations about potential problems with the foreign country’s capacity to service debt but that it agreed that the loan should be supported. The Department recommended support noting that:

• the exporting company was part of a group that had successfully completed similar projects in another country

• the project incorporated a high level of Australian content (90%), and

• when in production the processing facility would generate foreign exchange earnings to service the loan.

The submission also recommended a 50 % surcharge on the risk premium be imposed.

The ANAO considers that these reasons do not amount to clear justification for recommending that the proposal be considered beneficial to the national interest, having regard to the very high risk. While the proposal could be

consistent with a range of Government policy objectives, the benefits to Australia were not clearly specified in the submission.

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Case N°4

The proposal involved a loan or guarantee of $US30.3m to an overseas oil and gas authority for a gas condensate facility to be supplied and installed by an Australian company. EPIC decided that, because of the country risk and its exposure in that country, it could support only 30% of the required

finance on its commercial account and referred the proposal for consideration of the remaining 70% on the national interest account.

In its submission in October 1992 the Department outlined the Australian content involved and noted that die IDC supported the project. The Department’s comment on the proposal was that, aldiough the medium-term economic outlook for the foreign country was somewhat precarious, it had a

sound record of meeting its debts. The Department considered the risk to be acceptable and recommended that the proposal be supported.

The ANAO considers that the submission did not explain why it would be in the national interest to support the project. While an export contract of this nature could further a range of Government policy objectives, the benefits for the nation were not explicitly identified.

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I

Case N°5

The proposal involved a loan of $US19.6m to support a bid to supply steel bridges to an authority in a foreign country. EPIC considered that it was approaching the limit of its exposure in relation to that country and could take only 30% of the project on its commercial account.

In its submission in January 1993 die Department related some details of the exporter and die purchaser. It noted that the IDC did not oppose the project. The Department’s comment on the proposal was essentially that, despite die precarious outlook for die economy of the foreign country in the medium

term, its payment record had been sound and it was unlikely that the loan could be caught in a multilateral debt rescheduling. The Department considered the risk acceptable for the national interest.

The ANAO considers that the above reasons do not show how Australia would benefit by supporting the proposal in the national interest. An assessment that the loan is unlikely to be caught in a debt rescheduling does not constitute a high level of justification for it being in die nation’s interest

for the Commonwealth to carry the risk.

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The proposal involved a loan of $43.5m to support a bid for the expansion and upgrading of an airport in a foreign country. EFIC indicated that, for reasons of portfolio balance, it would be willing to carry only 30% of the project on its commercial account. It proposed that the balance be

underwritten by the Government in the national interest.

In its submission in February 1993 the Department noted that the IDC did not oppose the project, subject to the inclusion of certain conditions, but that one department strongly emphasised the security risks associated with it. That

department expressed concern about the political instability of the country and the vulnerability of the project and its personnel to terrorist attacks. That department also said that Australian involvement could bring significant trade spin-offs. It did not specify what they could be.

The Department’s comments on the project were that there was consensus that:

• the country’s financial risk was acceptable

• EFIC’s willingness to take 30% was satisfactory, and

• the only real concern was the potential for project disruption from terrorist/military action.

The Department’s view, shared by EFIC and the IDC, was that the risk was acceptable subject to the inclusion of appropriate clauses covering such disruption in contracts and agreements between the parties, including die foreign government buyer/borrower.

The ANAO considers that the above does not explain why it would be in Australia’s interests to support the project. Concluding that the risk of project disruption was acceptable would not seem to be strong grounds for considering it to be in the national interest for the Commonwealth to underwrite the payment risk.

Case N°6

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1 1■ •— I

J

T e l e c o m m u n i c a t i o n s p r o j e c t w o r k in V i e t n a m h a s b e e n f i n a n c e d u sin g n a t i o n a l i n t e r e s t e x p o r t fac ilit ies .

Photo courtesy of EFIC

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3. Notional Accounts on Financial Results

Chapter 3 examines the adequacy o f departmental information on the extent to which the national interest facilities and the main categories of national interest products are resulting in a profit or loss.

Introduction

3.1 The Department needs to be adequately informed about various financial aspects of the national interest facilities. It needs to know the cumulative financial position of the facilities, to help assess whether Australia's overall Government-supported export credit facilities are paying their way, as required under the subsidies code of the GATT. Adequate information on Commonwealth exposure under

the facilities is also required, to recognise the possible financial impact of the facilities on future Australian budgets. In addition, underwriting and premium rate strategies for national interest facilities should be set, having regard to the previous financial results of the

facilities.

3.2 Financial information on the operation of the facilities in respect of premiums received, claims paid, contingent liabilities, outstanding debts and recoveries was outlined in Chapter 1.

Financial results of national interest facilities

3.3 The AN AO noted that, although the facilities have been in existence for many years, there is no accurate financial information on whether they have been paying their way over time. The modified cash basis financial statements of the Department disclose some particulars of the Commonwealth’s role in national interest business, but are not intended to show the operational results or state of affairs

of the national interest facilities. The lack of accurate information on cumulative financial results is of particular concern in regard to the period from 1987 when the first major claims occurred. According to departmental records and as shown at Table 1.2, claims in excess

of $ 1.3b have been paid since 1 July 1987 compared with premium income of $81m.

3.4 Substantial claims due to non-payment have resulted from the economic difficulties of Egypt ($27lm) and Russia ($393m) and from the imposition by the United Nations of economic sanctions on Iraq ($520m).

3.5 Subrogated debts as at 30 June 1994 totalled $1.2b. Repayments by Egypt and Russia are the subject of multilateral debt rescheduling arrangements providing for repayments over 25 years and six years, respectively. The rescheduling arrangements by Egypt include up to 50% debt forgiveness in net present value terms.

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3.6 Deferral of debt repayment and adoption of concessional interest rates under these rescheduling arrangements effectively have written off part of die debts in present value terms. Repayment of Iraq’s debts has been delayed by the United Nations sanctions.

3.7 The Department advised the ANAO that it is fully aware of the financial position of the national interest facilities and provided the summary of national interest financial data which is set out in Table 3.1.

3.8 The Department stated that financial results of the national interest account are shown in EPIC’S accrual-based 1992-93 financial statements and in the Department’s statements.

3.9 The ANAO noted, however, that the EPIC financial statements disclose national interest operations to the point of transfers to Government accounts receivable and payable but not the cumulative profit or loss of the facilities.

3.10 National interest business financial information for 1992-93 and for the eight months to 30 June 1992, as extracted from EPIC financial statements, is set out in Appendix 2. (At the time of preparation of the audit report, EFIC’s 1993-94 financial statements had not been reported.)

Preparation of notional accounts

3.11 As mentioned in Chapter 1, an IDC reported on policy aspects of the national interest facilities in early 1993 and the Government subsequently accepted the conclusions of the IDC review. The IDC approached the question of pricing of national interest cover from the basis that premiums should be risk related and that they should be set at a level adequate to meet the objective that the national interest account pay its way over time. The IDC report referred to an exercise undertaken to provide information on the profit or loss of the

facilities by the preparation of a cumulative notional national interest account.

3.12 The exercise undertaken in conjunction with the IDC review to ascertain notionally the cumulative surplus or deficit of the facilities disclosed a cumulative deficit in the account as at 31 March 1990 of approximately $530m. However, the IDC decided that further work was required to refine the detail, particularly in relation to the treatment of unrecovered claim payments for sovereign debts.

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T a b le 3.1

S u m m a r y o f n a tio n a l in t e r e s t f a c i l i t i e s fin a n c ia l d a ta , a t 3 0 J u n e 1 9 9 4

$US

denom ination

C la im s paid • B udget 4 0 2 .6 m

• R efinanced 3 6 2 .4 m

through EFIC borrow ings

F u n d in g c o s t s 1 8.9m

(m et from th e Budget)

R e c o v e r ie s ■ B udget 0 .4m

- R efinanced 9 7 .9 m

through EFIC b orrow ings

$A

denom ination T otal am ount converted to $Am

1 7 .1 m 5 4 0 .3 m

2 7 0 .5 m 7 6 8 .6 m

1 3 0 8 .9 m

1 5 .6 m 4 2 .3 m

0 .5 m

1 2 2 .8 m 2 5 7 .3 m

2 5 7 .8 m

U n r e c o v e r e d c la im s 121 7 5 2 .9 m 1 8 3 .8 m 1 2 1 8 .7 m

C o n tin g e n t lia b ilit ie s '31 - Insurance

■ Loans

• O v erseas

in vestm en t insurance ■ Perform ance bonds and

w orking g u a ra n tees

A p p lic a t io n s p e n d in g 141

P r e m iu m in c o m e 151

8 8 7 .2 m 1 7 9 .7 m 1 1.4m

2 6 .3 m

1 1 0 4 .6 m

6 7 0 .4 m

1 4 2 .6 m

S o urce: D ep artm en t of Ind u stry , S cience and Technology

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N otes:

(1) A m ounts in $U S h av e been co n v erted to $A a t th e 3 0 J u n e 1 9 9 4 ra te o f 7 2 .7 5 US c e n ts to $A1 ex cep t w h e re a steris k e d (*).

In th e s e c a s e s , $U S conversion is a t th e ra te applying a t th e tim e of th e B udget tra n s a c tio n .

(2) The bulk of th is am o u n t re lates to p a y m e n ts due from:

E g y p t $U S 73.0m an d $A 1S 6.8m h a s been rescheduled over 25 y e a rs , including fo u rte e n y e a rs g ra c e at a

co n cessio n al in te re s t ra te incorporating up to 50% d eb t fo rgiveness in n et p resen t value term s

R u s s ia $ U S 2 7 7 .7 m relatin g to th e d e b ts of th e form er Soviet Union h a s been rescheduled ov er six y e a rs, including

tw o y e a rs g ra c e a t a com m ercial in terest ra te , and

Ira q $ U S 3 9 7 .2 m and $A 2.5m h a s no t been paid due to UN san ctio n s a g a in st Iraq.

(31 Includes $ A 6 4 4 .2 m of rescheduled d e b ts , which have been refinanced (Egypt and Russia).

(4) N ational in te r e s t tr a n s a c tio n s approv ed but aw aitin g outcom e of bid or finalisation o f co n trac tu a l a rran g em en ts.

(5) Prem ium incom e since th e inception of th e national in terest facility credited to CRF, n et of EFIC's ad m in istratio n c o sts.

3.13 The IDC report approach that the national interest account should pay its way over time was stated to be consistent with obligations under the subsidies code of the GATT. The ANAO noted, however, that the provisions in that agreement refer to overall Government export guarantee and insurance programs whereas the IDC report dealt only with the national interest part of

Government-sponsored export support operations. The exercise carried out to determine the cumulative profit or loss, mentioned above, related only to the national interest facilities and did not take into account EPIC commercial account operations.

3.14 In response the Department said that Australia has always operated on the basis that the overall Government-supported export credit operations should pay their way over time.

3.15 Although an exercise was undertaken as part of the IDC review to prepare notional accounts with the assistance of the Department of Finance and EFIC, formal decisions have not yet been made by the Department to define the concept that the facilities should pay their way over time or to set parameters for measuring the facilities. The ANAO considered that the parameters should be set having regard to:

• whether EFIC commercial operations and national interest operations should be combined in determining the extent to which the overall export credit operations are paying their way over time

• determination of the period over which the facilities would be expected to pay their way. The international agreement provides that evaluation of the long-term adequacy of premium rates is to take into account only contracts concluded after the effective date of the agreement in 1979. (This provision does not appear to have been observed in the exercise mentioned above.)

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• the extent to which administrative costs incurred by the

Department and EFIC should be recoverable

• whether interest subsidies and any debt refinancing costs should be recoverable

• whetiier annual surpluses should be notionally accumulated as reserves with notional interest earnings applied to such reserves, and

• accounting policies for raising and recognising subrogated debts, providing for doubtful debts, creating reserves to meet future losses, treating waivers, write-offs and unearned income and using present value accounting.

Departmental comment

3.16 In commenting on the exercise undertaken in conjunction with the IDC review, the Department stated that it was an illustrative form of notional account to demonstrate the manner in which additional information about national interest facilities might be presented for Ministers. The Department indicated that it was only a preliminary

draft that should not be given the status accorded to it in the audit report, as it contained numerous errors and omissions, and its use in that way would be misleading.

3.17 The Department advised it envisaged that the move by EFIC to full accrual accounting for the national interest account in its 1992-93 financial statements and the Department’s proposal to prepare a trial full accmal financial statement for 1993-94 might provide the basis

for adequate financial information to assess the financial results of the facilities. With the move to accrual accounting die Department initiated discussions with the Department of Finance to determine whether preparation of notional accounts was still necessary.

3.18 The Department later advised the ANAO that it was now addressing the development of notional accounts. It noted that notional accounts raised a number of difficult concepts.

3.19 The Department said that there is at present no clear

international agreement on interpretation of the provisions of the GATT subsidies code in respect of government-sponsored export credit facilities. The issue of compliance with the requirement that export credit programs should pay their way over time is the subject

of an international multilateral review in which Australia is taking an active role. The Department indicated that it expected the review to be completed before mid-1995. Some of the issues being addressed are whether national interest business and ‘catastrophic losses’ should be included in the concept of the facilities paying their way over time. Attention is also being given to the effects of the debt crisis, multilateral long-term debt relief, which often incorporates debt

31

forgiveness, and the growth of long-term loans at concessional rates, on a GATT concept which was framed in the 1950s.

3.20 The Department’s view is that, putting aside the claims relating to the sales of wheat and other commodities to the Governments of Egypt, Iraq and the former Soviet Union, the requirement for the facilities to pay their way over time would have been met. The Department noted that most of these debts have not been written off and recovery is expected. It considered that some of the AN AO comments and draft recommendations referred for discussion were premature, as it may need to reassess its approach to the requirement that the facilities pay their own way over time in the light of any

future proposals arising from the multilateral review.

ANAO comment

3.21 The ANAO considers it is important for management purposes for the Department to develop a satisfactory means of measuring the financial result of the facilities which adequately reflects approved operating parameters. Moreover, it is unclear whether the cumulative results of the national interest account can be disclosed adequately in the accmal statements of EPIC or the Department.

3.22 The ANAO noted that the requirement for the facilities to pay their way has existed for many years and, as there is still no adequate measure of the extent to which the requirement is being met, further delays in the preparation of this information would be undesirable. In view of the importance of this critical measure in terms of meeting

international obligations and for management purposes, work on devising the means of measuring the financial results of the facilities under the existing requirements should be completed as soon as possible.

3.23 The IDC report, which the Government agreed should be implemented, proposed that improved transparency be provided in the presentation of information on the operation of the national interest account through regular reports to Ministers on a cumulative notional account. If the outcome of the multilateral review results in changes to the requirements, action could then be taken to modify the particular parameters affected.

3.24 Having regard to the impact of the facilities on moneys provided from public funds and current and future Commonwealth liabilities, the ANAO has doubts concerning any proposition that claims arising front catastrophic events should be set aside, especially in any unilateral consideration of the financial impact of the facilities on past and future Australian budgets.

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Recommendation N°7

3.25 The ANAO recommends that the Department:

(a) improve the transparency of the national interest account through the development of a cumulative notional account as endorsed by Ministers and in accordance with the requirements of the subsidies code of the GATT

(b) propose to the Minister that the notional account be available for die information of the Parliament and the public, and

(c) consider whether underwriting and premium rate strategies need to be changed in the light of the financial result disclosed by the notional account.

Accounting for each product

3.26 The Department did not prepare separate accounts to show the profit or loss for each type of facility such as insurance, loans, performance bonds and working capital guarantees. The individual products differ in operational characteristics and in view of this it is considered desirable that separate management accounts be established for each of the main product categories. This would provide improved management information that would disclose the profit or loss for each category and enable the Department to ascertain whether the respective premium and fee structures result in some products

subsidising other products.

Recommendation N°8

3.27 The ANAO recommends that the Department prepare separate management accounts for each of the main categories of national interest products.

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National interest performance bonds o f $ 7 0 m have assisted exports of 3 2 ferries. Photo courtesy o f EPIC

34

4. Underwriting and Premium Rates

Chapter 4 reviews departmental practice in recommending premiums fo r national interest proposals. It also examines the extent to which the Department seeks to encourage national interest outcomes other than payment for exports, by means o f underwriting conditions.

Introduction

4.1 The AN AO examined the basis on which the Department provides advice to the Minister and recommends underwriting conditions and rates of premiums and fees for individual proposals. The examination was made having regard to the high level of claims paid in recent years compared with the level of premium and fee income, the position in respect of recoverability of subrogated debts and the objective that the facilities pay their way over time.

4.2 The ANAO also considered the case for varying underwriting arrangements to advance broader Government policies or to minimise the risk to the Commonwealth of national interest cover in appropriate

circumstances.

Surcharges for risks

4.3 Underwriting and premium rates for national interest proposals have been recommended by the Department to the Minister without knowing the cumulative profit or loss of the facilities. The cumulative financial results should be a factor in setting underwriting

and premium policies and rates.

4.4 Until 1992 premiums and fees were based on an arbitrary, across-the-board surcharge of 25% above EPIC commercial rates. EFIC’s rates incorporate weightings for market risk based on four gradings, the terms of the contract and the reliability of the exporter and the buyer. Apart from these weightings, no attempt appeared to be made by the Department to recommend rates which related premiums and fees to the level of risk for specific proposals or to amounts necessary to cover the costs and outgoings of the facilities.

4.5 The IDC review examined a number of options for pricing national interest cover, including determination of notional commercial rates discounted to reflect the perceived level of national interest. It concluded that the various alternatives examined all aimed at a degree of precision which in practice would be extremely difficult to achieve and accepted that there were advantages in having a

practical and administratively simple premium rate structure.

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4.6 The IDC report proposed that surcharges of zero, 25%, 50%, or another rate replace the arbitrary 25 % surcharge. The report also proposed that EPIC:

• provide an assessment of each proposal, including the economic and political risk involved

• indicate why each proposal is referred for national interest cover, and

• recommend a level of surcharge to be applied over the EPIC base rate.

4.7 During the latter stages of the IDC review differential surcharges were recommended in the Department’s submissions to the Minister. The report’s conclusions were endorsed by the Government in February 1994. The Government decided that a further review of premium and fee structures would not be carried out until at least after an OECD examination of premium rates and related issues, expected to be completed before mid-1995.

4.8 Since 1992 higher levels of risk generally attracted higher surcharges in accordance with the IDC proposals.

4.9 In commenting on the ANAO observation that underwriting and premium rates have been recommended without the cumulative profit or loss of the facilities having been assessed, the Department indicated that the current financial position of the national interest

facilities is known. It is also aware of previous Tosses’ on the national interest account and this has been taken into account in Government decisions on ongoing national interest support.

4.10 The ANAO gave consideration to the need for higher premiums for national interest business, arising out of the high level of claims in recent years compared to the level of premiums. The Department advised that internationally it is not considered feasible to expect new exporters to pay for previous losses incurred by export credit agencies. The ANAO considered, however, that if the facilities are to pay their way over time, premiums for exporters should have regard to the need to build up sufficient notional reserves to meet future losses (rather than to recover old losses). The Department responded that premium rates were structured to include a contribution to reserves.

Linkage to other Government policies

4.11 The ANAO examined whether, in making recommendations to the Minister on national interest proposals, the Department gives consideration to longer term objectives for the development of exports and meeting the objectives of other Government policies. Proposals were examined to ascertain whether the facilities encourage outcomes

36

which meet those objectives and discourage proposals which may be contrary to the achievement of those objectives.

4.12 There was a lack of evidence in a number of cases that these issues were specifically considered on a systematic basis. Accordingly, the AN AO made recommendations for the use of an expanded checklist of national interest factors and for improved documentation in the assessment of proposals.

4.13 The AN AO considered whether it may be desirable to introduce features into the facilities which integrate with and complement other Government policies such as adding value to natural resources, meeting environmental standards or industry reform, in order to encourage the achievement of the objectives of those policies. Meeting such objectives would appear to be, in general terms, in the

national interest. This could be done by incorporating in

recommendations to the Minister, premium and fee rates and underwriting conditions that are more incentive driven and risk responsive.

4.14 There was no evidence that the level of surcharges

recommended for proposals since 1992 was related to national interest considerations other than risk. Setting lower premiums for specific proposals which had very significant national benefits could have some advantages. In response the Department advised that

international practice requires that premiums be risk based.

4.15 The AN AO also addressed whether provision of incentives by way of rebates for follow-on national interest business may provide an environment in which the objectives of other Government policies are more likely to be met and may encourage sustained export growth.

The Department advised that, in its experience, such rebates are impractical and it believes that, unless specific circumstances indicate otherwise, premiums should remain risk based.

4.16 The AN AO noted that the risk to the Commonwealth of national interest proposals could be reduced where EPIC takes on part of the risk in its commercial account and the exporter also carries part of the risk; for example, a proposal could be approved for 70%

national interest cover, 20% EPIC commercial cover, and the exporter carrying 10% of the risk.

4.17 The AN AO considered the case for further use of risk sharing to minimise the risk borne by the Commonwealth. In Chapter 2 the AN AO recommended the identification and assessment of specific risks. Where the assessment of a specific risk discloses an extremely

high risk of non-payment, perhaps because of doubtful capacity of the purchaser to pay, it may be desirable to place an excess on the contract requiring the exporter to meet the first portion of any loss in order to reduce the exposure of public funds to potential claim payments.

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4.18 The Department stated that while risk sharing is a standard feature of short-term credit insurance and overseas investment insurance, it is not normally an option for medium- or long-term

credit transactions where the exporter would have to carry a contingent liability on its balance sheet for the life of the loan. An accumulation of even small exposures will undermine the exporter’s capacity to fund ongoing business. EFIC’s role is to avoid this and ensure that export business is not lost. The Department advised that there are also practical difficulties with the proposal.

4.19 Consideration was also given by the ANAO to the desirability of varying underwriting conditions over time to assist in achieving the objectives of other Government policies. In particular, national interest underwriting conditions could promote industry reform for mainstream exports such as wheat, which historically has received considerable support from the national interest facilities. As an example, a strategy could be considered for recommendation to the Minister to reduce national interest cover on contracts for low grade wheat exports over a period in order to encourage the wheat industry to produce higher grade wheat for less risky markets. The Commonwealth would no longer bear 80% or more of the risk of non-payment of such wheat credit sales. Insurance cover could be reduced to, say, 50%, by 5% a year over six years, with advance notice of, say, two years. Such proposals would reduce longer term exposure of taxpayers’ money and complement other Government policies, such as introducing price differentials for higher wheat grades. The proposals would also have a major impact on strategies adopted in relation to the scheme paying its way over time by reducing the underwriting exposure to high risk markets for the sale of lower grade wheats. Insured wheat credit sales, particularly to Egypt, previously led to significant claims against the national interest

facilities.

Departmental comment

4.20 The Department made the general comment that, where appropriate, the Government does use the national interest facilities to support wider policy objectives. However, in most instances, proposals referred to the Minister for national interest consideration are one-off export opportunities. The Department stated that, ultimately, strategic use of the national interest facilities is a policy matter for the Government.

4.21 In commenting on the possible graduated variation of underwriting conditions for wheat credit exports over time, the Department considered that the ANAO example does not comprehend the complexities of the wheat industry, international wheat marketing and the role of export payments insurance. It noted that a wide range of price differentials already operated for various grades of wheat. The Department stated that, notwithstanding this, there will always be

38

a low quality end of the crop due to a wide range of factors,

including climate. It also said this wheat is not necessarily sold on credit or to high risk markets.

4.22 The Department of the Treasury and DPIE also commented on this issue.

Treasury comment

4.23 The Treasury accepted the potential influence on resource allocation of the provision of services such as export insurance at prices which do not fully reflect costs. It said, however, that although the availability and pricing of national interest insurance

cover is no doubt a factor in decisions of producers to grow a particular grade of wheat, it is not apparent that the ANAO suggestion to use national interest export insurance conditions to influence resource allocation in the wheat industry is necessarily the

best way to address any existing distortion of incentives. A wider ranging examination of the wheat industry would be necessary, for example by the Industry Commission, in which the availability, conditions and pricing of export insurance cover would be an issue.

Primary Industries and Energy comment

4.24 DPIE expressed the view that it is inappropriate to use wheat as an example in considering the desirability of varying underwriting conditions over time to assist in achieving broader Government objectives. DPIE favours continuing current national interest support

for wheat credit sales to overseas markets. Its reasons for this view related to features of Australia’s wheat production and marketing, the characteristics of the international wheat market and the significance of national interest credit insurance for wheat exports.

4.25 DPIE referred to several features of Australia’s wheat production and marketing as being relevant:

• the level of Australian wheat production and wheat quality varies from year to year, due to seasonal factors

» from 70 to 80% of the annual Australian wheat crop is traded internationally. The Australian Wheat Board (AWB) has a high exposure to the vagaries of the world market, which is distorted by export subsidies, food aid programs, limited market access,

income support arrangements and government credit programs, and

• the AWB has wheat-production strategies in place that meet the quality specifications required by particular markets, from high protein wheats to lower protein wheats for noodles.

4.26 DPIE considered that the price premiums the AWB offers for higher protein wheat are a much more direct and effective method of passing on market signals to growers than limiting the level of credit

39

insurance cover for sales to particular markets. It added that the effect of the pooling system is to soften the impact of sales to lower returning markets. For this reason, the ANAO suggestion to limit national interest cover would have limited effectiveness in passing signals on to growers.

4.27 In respect of the international wheat market DPIE advised that:

• there is no direct correlation between the riskiness of markets and the quality of their wheat purchases. Different markets require different qualities and grades of wheat, depending on proposed uses

• there is a limit to the number of buyers in the world market prepared to pay price premiums for high quality wheat, as well as a limit to Australia’s access to those markets

• in the current world trading environment, credit is an important part of the marketing strategy of the AWB. Australia already has a significant share of the larger cash markets in the Asia-Pacific region, and

• judicious use of credit is a means of developing markets with long-term potential.

4.28 DPIE’s view is that a lower level of national insurance cover would undoubtedly discourage the AWB from making sales to risky markets. However, it said that the current requirement for the AWB to accept a share of the credit risk on behalf of growers is a most effective means of ensuring that the AWB acts in a responsible and commercially prudent manner. DPIE said that in many instances no credit insurance means that the AWB is unable to make a sale. Requiring the AWB to assume a greater share of the risk also places it at a competitive disadvantage to other international suppliers that enjoy more favourable government-backed credit facilities.

4.29 DPIE concluded that it would be a difficult and risky industry policy strategy for the Government to attempt to intervene in the market by limiting credit cover to higher quality wheat.

ANAO comment

4.30 The ANAO notes that the Departments do not support the proposal canvassed by the ANAO for reduction in national interest cover over time to encourage the wheat industry to produce higher grade wheat for less risky markets. The ANAO recognises the cogency of some arguments for continuing current arrangements. Australian wheat exports must compete in a particularly difficult international trading environment. Australian wheat output and quality are susceptible to unfavourable seasonal weather conditions.

4.31 However, the ANAO remains of the view that further consideration should be given by the Department to longer term strategies using national interest cover to promote broader

40

Government policy objectives. Credit insurance for wheat exports necessarily should be part of that consideration, as the wheat industry has been the major long-term beneficiary of the national interest facilities and large defaults previously have been associated with

national interest wheat credit sales.

Recommendation N°9

4.32 The AN AO recommends that the Department consider adopting longer term strategies to assist in the achievement of other Government policies by introducing graduated variations to underwriting conditions over a number of years.

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5. Management Information Systems

Chapter 5 deals with management information system requirements to support the national interest facilities.

Introduction

5.1 The Department needs to have national interest management information systems to provide information to manage and monitor the facilities and to report on their performance.

5.2 The main information available to the Department is in the form of quarterly reports from EPIC. The reports show the status of national interest proposals and the level of exposure on the national interest account. Premium income and payment arrears are also

disclosed. EPIC provides the Department with other operational information about the facilities on request.

5.3 The data available from current sources provide some useful information but additional key management information would improve accountability and provide the basis for more informed management decisions.

5.4 In the ANAO view the additional information recommended below should be readily available from EPIC and would not involve using significant additional departmental resources.

Case register

5.5 The Department has a national interest case register but does not use it to prepare any regular operational statistical reports. The case register does not provide sufficient information in a readily useable form.

5.6 Improvements to the case register would provide the basis for preparation of annual statistics which would be useful in monitoring changes and trends in the operation of the facilities.

Recommendation N°10

5.7 The ANAO recommends that the Department prepare annual statistics on the particulars of cases processed and improve the format of the national interest case register by including:

• a separate case number series for insurance proposals, loan proposals and other proposals subject to approval by the Minister, with separate sections in the register for each category

• information on cases approved, cases rejected, cases where contracts are won and cases which are not activated, and

43

• details of the submission, approval and payment of claims for cases where claims are made.

Computerised databases

5.8 The Department has a computerised database of particulars of cases referred by EFIC, but it is not effective. Development of a computer-based financial information system has commenced but this is not yet in use.

Recommendation N °ll

5.9 The AN AO recommends that the Department take steps to define the requirements of its computer-based systems for the national interest facilities and complete the development of those systems as soon as practicable.

Recommendation N°12

5.10 The AN AO recommends that the Department seek additional information from EFIC that would enable improved operational management information to be provided, including:

• particulars of movements in the annual balances of debtors, creditors, contingent liabilities and loans

• age analyses of debts

• separate annual and cumulative profit/loss figures for each product category, and

• annual and cumulative statistics of exports generated.

5.11 This information would provide the basis for more informed management of the facilities, policy advice and recommendations to the Minister.

16 November 1994 Canberra ACT

W.G. Nelson

Acting Auditor-General

44

Appendix 1 EFIC National Interest Business Activities, 1992-93

EFIC n e w n a t io n a l i n t e r e s t i n s u r a n c e and loan b u s i n e s s , 1 9 9 2 - 9 3

Type C ountry Value

$m

I n s u r a n c e D eclaratio n s of w h e a t s ales Iran 9 7 .9 7

P a k ista n 5 5 .5 3

R ussia 8.98

D eclaratio n s of b u tte r s ales USSR 7.38

D eclaratio n s of w ool s ales Poland 0 .1 8

O v erseas in v estm en t insurance C am bodia 1 1 .4 4

L o an s E xport fin an ce loan India 1 7.67

E xport fin an ce loan V ietnam 1.43

EFIC n a t i o n a l i n t e r e s t p e r f o r m a n c e b o n d a n d w o r k i n g c a p i t a l g u a r a n t e e o p e r a t i o n s , 1 9 9 2 - 9 3

Facility tr a n s a c tio n s Value

$m

P e r f o r m a n c e b o n d s

Issued an d o u ts ta n d in g a t 3 0 J u n e 1993 1 5 .7 4

R edeem ed /ex pired 1 4.10

S u p p o rt com m itted in principle 1 7.87

W o rk in g c a p ita l g u a r a n te e s

Issued and o u ts ta n d in g at 30 J u n e 1993 1.87

R edeem edfexpired 0 .1 6

S u p p o rt com m itted in principle 8 .3 6

S o urce: EFIC A nnual R eport 199 2 -9 3

N ote: T he p erfo rm an ce bond and w orking c a p ita l g u a ra n te e facilities a re 'revo lving' facilities. Each h a s a maximum conting ent

liability s h ared b e tw e e n EFIC and th e C om m onw ealth. W here a bond or g u a ra n te e on issue expires w ith o u t loss, th e

am o u n t becom es available fo r issue un d er th e facility.

45

Appendix 2 EFIC National Interest Financial Information, 1992-93

EFIC N a tion a l I n t e r e s t P ro fit and L oss S t a t e m e n t

8 m o n t h s t o

3 0 J u n e 1 9 9 2

$ 0 0 0

1 2 m o n t h s t o

3 0 J u n e 1 9 9 3

$ 0 0 0

O P E R A T I N G R E V E N U E

Export fin an ce fe e s and in terest 3 3 35 3 5 4 7

Export fin an ce in te rest subsidy 19 2 5

Prem ium revenue 2 273 4 8 3 0

Inv estm ent and o th e r incom e 17 6 40 12 0 3 7

T otal O perating R evenue 23 267 20 4 3 9

Less: G overnm ent a c co u n t payable (23 267) (20 4 3 9 )

O P E R A T I N G E X P E N S E

In terest on borrow ed fu n d s 19 9 36 29 281

A dm inistrative ex p en ses .... ....

N et claim e x p e n ses · insurance 18 3 43 (23 383)

Claim e x p e n ses - loans 361 1 8 9 8

U nderw riting ex p en ses .... ....

Bad and dou b tfu l d e b ts · loans .... 15 4 1 9

T otal O perating E xpense 38 6 40 23 2 1 5

Less: G overnm ent a c co u n t receivable (38 640) (23 215)

O P E R A T I N G P R O F I T .... ....

A C C U M U L A T E D P R O F I T S A T B E G I N N I N G O F F I N A N C I A L Y E A R .... ....

A C C U M U L A T E D P R O F I T S A T E N D O F .... ....

F I N A N C I A L Y E A R

Source: EFIC Annual R eport 1992-93

Note: The period fo r th e eight m onths to 30 J u n e 1992 covers operatio n s from 1 N ovem ber 1991 w h en EFIC w a s established

as an in dependent en tity u n d er th e EFIC Act.

46

EFIC N a t i o n a l I n t e r e s t B a l a n c e S h e e t

3 0 J u n e 1 9 9 2

$ 0 0 0

3 0 J u n e 1 9 9 3

$ 0 0 0

C U R R E N T A S S E T S

Cash .... ....

R eceiv ables 182 2 9 7 170 691

Claim recoveries receivable 10 745 2 4 515

In v estm en ts 11 7 46 13 760

T o tal C urren t A s se ts 2 0 4 7 88 2 0 8 966

N O N C U R R E N T A S S E T S

R eceiv ables 2 5 9 5 8 4 2 6 9 118

Claim recoveries receivable 3 1 3 8 4 4 4 2 7 0 59

In v estm en ts .... ....

P ro p erty , p lan t a n d equipm ent .... ....

T o tal N on-Current A s se ts 5 7 3 4 2 8 6 9 6 177

T O T A L A S S E T S 778 2 1 6 9 0 5 143

C U R R E N T L I A B I L I T I E S

C red ito rs and bo rro w in g s 5 3 2 636 7 9 6 8 9 9

O u tstan d in g in su ran ce claims 2 3 3 3 9 7 6 3 2 55

P rovisions - ....

O ther 768 1 725

T o tal C urren t Liabilities 766 801 861 879

47

3 0 J u n e 1 9 9 2 3 0 J u n e 1 9 9 3

$ 0 0 0 $ 0 0 0

N O N C U R R E N T L I A B I L I T I E S

C reditors and borrow ings .... 31 1 5 7

Provisions .... ...

Deferred loan incom e 11 082 11 3 8 8

Other 3 3 3 7 1 9

Total N on-Current Liabilities 11 4 1 5 4 3 2 6 4

T O T A L L I A B I L I T I E S 778 2 1 6 9 0 5 143

N E T A S S E T S .... ....

E Q U I T Y .... ....

Capital .... ....

Reserves .... ---

A ccum ulated p ro fits .... ....

T O T A L E Q U I T Y --- ....

Source: EPIC Annual R eport 1992-93

Series titles Titles published in the Financial year 1994-95

Audit Report No. 1 Project Audit Other Tides

Commonwealth Scientific and Industrial Research Organisation Annual Report of the Australian National Audit

- Follow-up of an Efficiency Audit Office 1993-94

of External Funds Generation Tabled 24 August 1994

Audit Report No.2 Department of Defence Follow-up Audit Management of Army Training Areas

Preliminary Study Acquisition of Additional F - l ll Aircraft

Audit Report No.3 Project Audit Wool Tax Australian Taxation Office

Audit Report No.4 Project Audit Special Investigation into Casselden Place Building, Melbourne

Department of Administrative Services

Audit Report No.5 Follow-up Audits Department of Employment, Education and Training - New Enterprise Incentive Scheme (NEIS) - Protective Security

- AUSTUDY

Audit Report No.6 Efficiency Audit Australian Taxation Office Information Technology Security

Audit Report No.7 Efficiency Audit Department of Industry, Science and Technology National Interest Export Finance and Insurance

THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA

PARLIAMENTARY PAPER No. 418 of 1994 ORDERED TO BE PRINTED

ISSN 0727-418

Cat. No. 94 2421 3 A50042